yieldsck victory sent soaring but how much further do they have to go? mark carney is speaking down the road, delivering the news surrounding the stress tests. due to strains on emerging market currencies and growing skepticism over the ability of some international banks to adjust their business models to new environments for regulation, for growth, and for interest rates. in june, developments kosher to hone -- home brought strains of their own. prices have reacted strongly following the u.s. election with echoes of the treasures at the start of the year on sovereigns and banks. throughout these episodes, the u.k. financial system has stood up well. deafening rather than amplifying volatility in financial markets. households and businesses in the u.k. have as a result and able ,o focus on what they should where there their home is right for their families or a better investment would help them serve their clients. this was in -- resilience has been hard one. done.a job that is never today's stress tests are the next stage of our efforts to maintain the resilience of our financial system is the u.k. economy adjusts to the u.k.'s new relationship with the eu in an environment of elevated global and domestic risk. the most significant risk to u.k. financial stability are global. growth in china is increasingly reliant on credit expansion. since the global financial sector debtnese non- has risen relative to gdp. it stands at 260% of gdp. this is extremely leverage for an advanced, let alone, an emerging economy. there are signs the capital outflows from china and other emerging markets have begun to pick up in recent months and may accelerate further depending on the degree and pace of increases in u.s. market interest rates. in some euro area economies, sovereign, the sovereign debt positions remain vulnerable to costs androwing weaker growth prospects that could be associated with trade or political risk. moreover, the challenge is to of the euroce part area banking sister met remain. additional risk to the euro area could emerge as a consequence of the u.k.'s withdrawal from the european union. banks located in the u.k. supply over half the debt and equity issuance by continental firms and account for over three quarters of foreign exchange and derivatives activity in the eu. if these you came these firms have to adjust their activities in a short time from there could be a greater risk of disruption to services provided to the european real economy. some of which could spill back to the u.k. through trade and financial linkages. riskhannel by which global could affect u.k. financial stability is fire the current account. at 5.9% of jeep -- dp, the account deficit remains large by historical and international standards, and it's smooth financing depends on foreign investor appetite for u.k. assets. us sharp adjustment to capital inflows could test financial stability by tightening financial conditions for the real economy, adding pressure on the currency, and worsening the trade-off between growth and inflation. for example, in recent years, foreign investors have accounted for around half of all commercial real estate transactions. over the past year, says overseas investment has been cut in half and the value of commercial real estate transactions has fallen by one quarter. of fall in the value sterling since the referendum suggests that market participants expect the u.k. trading arrangements will be less open for a time and real income growth will be more modest. at the same time, with no apparent change to their job security, and with credit available and cheap, consumers are drying down their savings and borrowing for the first time since the crisis. these developments reinforce existing vulnerabilities from high and rising u.k. household indebtedness. to guard against such risks, the ftc has therefore agreed to maintain the recommendation it made in june mortgagewner occupied underwriting standards. this will help ensure that standards do not slip from responsible to reckless as they have during past times of consumption led growth. tests, thethe stress resilience of the system in part request the consistent build up of capital resources by banks since the global financial crisis. tierggregate common equity one capital of remainder u.k. banks is 13.5% of risk-weighted assets. that is higher than the level of capital, higher than the level of total capital that the fpc requires in normal circumstances. as result, the u.k. banking system is well placed to provide credit to households and businesses during times of severe stress. that conclusion is corroborated by the 2016 stress tests, which was the first to be conducted under the bank's new annual cyclical scenario or acs framework. this framework assesses risk emanating from the financial its --it's brought on -- reaching across markets and jurisdictions. this year's test included synchronized you can global recession, the shocks due to market prices. setglobal gdp growth trough -1.9% as it did during the 2008 global financial crisis. the level of u.k. gdp falls by 4.3% and the unemployment rate rises by 4.5 percentage points. the stress test u.k. house prices fall by over 30% and commercial real estate by over 40%. the scenario includes stress projections generated by inc. staff for potential misconduct costs. the combination of all these stresses leads to systemwide losses of 44 billion pounds over the first two years of the stress. or around five times those incurred by the same bank over the two years at the height of the financial crisis. despite the fact that this year's test is more severe than its predecessors, the aggregate low point of the 2016 test is higher. it -- the better outcome reflects improvements and capital positions and their greater reliance on -- and the greater balance sheet resilience. -- stress test judged that banks against our new hurdle rate framework which includes so-called pillar 2a requirements, the correct for deficiencies in the banks' internal models. the test also held systemic firms to an even higher standard , reflecting the phasing in of additional capital buffers for them. the test results illustrate how both at1 instruments, and management actions can mitigate the impact of stress. for three banks, instruments would convert to ct one capital as the ratios fell below 7%. and all banks would significantly cut their dividend payments and variable pay in order to conserve capital. this is exactly how the system should work under stress in order to mean -- maintain resilience and still serve u.k. households and businesses. in terms of the bottom line, the pra board judged that while the test revealed some capital inadequacies for three individual banks, these banks each now have in place the necessary plans to build their resilience further. in taking those plans into account and the results of the stress test, the ftc judged -- fpc judged that the banking system is capitalized to support the real economy even under a broad, severe, and secret eyes stress scenario. as a result, the fpc did not require any systemwide macro prudential access from bank capital. back in july, the fpc reduced the countercyclical buffer rate on banks u.k. exposures from half percent zero. this was a response to greater uncertainty around the u.k. economic outlook and the increased possibility that material downside risk could crystallize in the near term. the fpc was concerned that banks could respond to these developments by hoarding capital and restricting lending. sea cybction of the rate was intended to reinforce the expectation that all elements of capital liquidity buffers are able to be drawn down in order to support the real economy. and that position has not changed. the continued uncertainty around the u.k. economic outlook and the resilient demonstrated by the test, the fpc agreed to maintain its sea cyb rate at 0% and it expects absent any material change in the outlook to maintain that rate at least until june 2017. the bank of england has now conducted three complementary stress tests. next year, for the first time, we will conduct both an annual cyclical scenario as we just did and we are announcing today as well as a new biennial exploratory scenario. the latter will probe the resilience of the system to risks that are not neatly linked to the financial cycle such as slowburn risk affecting the banking sector and their business models. to conclude, the u.k. financial system has demonstrated its ability to dampen rather than amplify the impact on the real .conomy of a series of shocks it's resilience has been further reinforced by the 2016 stress tests and such resilience may prove valuable given the elevated likelihood that and suy prove valuable given the elevated likelihood that some u.k. specific risks to financial stability could materialize. it will take time to clarify the uk's new relationship with the eu and the rest of the world. and the orderliness of the u.k. economies adjustment to these changes will influence the risk to financial stability. but irrespective of the united kingdom's future relationship consistent with its statutory responsibilities, the fpc will continue to promote the resilience of the u.k. financial system. this will require a level of resilience at least as great as currently planned, which itself exceeds that required by international baseline standards. it is on that basis that the people of the united kingdom can move forward with confidence that they can access the financial services that they will need to seize the opportunities ahead. john, and it, sam, would be pleased to answer your questions. >> stick to one question for the first go-round. thank you. >> the orderliness of the exit, what do you mean by that? he said he could threaten financial stability. the u.k.'sabout provision of financial services. have you put any thought about quantifying what that might mean if the business were lost and what impact that would be. >> in terms of the transition to the new arrangements, the move from where we are today to the new relationship with the european union, as the prime minister has said, it is preferable that that process is a smooth and orderly as possible. there is going to be a transition that either happens at the end of the negotiation of , oractual new arrangement that happens during the process of the negotiation. transition will happen, it is a question of when and how. preferable that firms know theuch as possible about desired endpoint, what type of relationship would be there, and as much as possible, as early as possible about the potential path to that endpoint. firms are making contingency variety of potential outcomes as we would expect them to do. as the supervisor of all the banks, all the broker-dealers, all the reinsurers, and the united kingdom, we have direct line of sight to this contingency plans, we know exactly what they currently intend to do under certain circumstances. or under any circumstances. we talked to the asset management sector so we have a pretty good idea of what they would do as well. clarity, whene of promote ae, will help smooth and orderly transition. i would stress that it is still very early days. i said this the other day in testimony to the gse. days, article 50 has not been triggered. the timing of those plans and the point at which firms would need to put them into action is still some way off. greater time to develop clarity around the endpoint and the path. we fully recognize that these issues are just one piece of a much bigger puzzle that the government has to weigh. there are broad range of issues around defining that new relationship and only the them up andan weigh balance them and prioritize them and execute them. the second part of your one impact,, related to the to summarize it on the impact on , and itf this process is important to recognize that the united kingdom is effectively the investment banker for europe. and than half the equity debt raised is raised in the united kingdom by firms based in the united kingdom quite often to investors based in the united kingdom. markets,important derivative markets, interest rates, credit derivative markets, foreign exchange markets, the vast majority of those transactions take lace here. -- place here. these activities are crucial for firms in the european real economy, and it is absolutely in the interest of the european union that there is an orderly transition and that there is continual access to those services and those services benefit very importantly from conglomeration benefits, economies of scale, economies of scope that exist because they are part of the world's leading financial center that serves not just europe but asia, africa, the middle east, and the rest of the world. the spc's assessment that the --. election has been forcing existing vulnerabilities. would that be the same if the election had been a win for hillary clinton? mr. carney: we will never know. sort of pointless to speculate on that but perhaps the best thing is to walk -- the dynamics are unfolding and what its is about resilience of the u.k. how it comestem, back to us. as broad, the expectation is that there will be some significant financial -- fiscal stimulus by the you -- new u.s. administration. the president-elect has outlined the broad elements of that tax reform and major tax cut and infrastructure spending, the details obviously as with any budget will come with time to the legislative process, but it is significant stimulus at a time when the u.s. economy is increasingly operating close to full capacity. the consequence of that has been an increase in u.s. market interest rates. the first elements of so-called snapback risk and i will come back to that, and strengthen the u.s. dollar. that has put some pressure on some emerging market. capital fromof emerging markets flowing back to the center, pressure on the currency's, similar to what we have seen at the turn of the year, the start of this year. the way i look at it, the fpc looks at it from a u.k. perspective is that the potential for sharper moves, for continuation of these moves, the question is how will prepared is our system for that possibility? this is something we did test a 2015 stresso, the tests, the yield curves steepening quite rapidly. it is something that has elements of this test. we also in this test have a very sharp weakening in emerging market growth and chinese growth where our institutions have exposure.tantial quite naturally, it is the second-largest and still the fastest growing economy in the world so it is natural they have exposure but we stress them to the was exposures. -- and those exposures. we feel quite comfortable that the system has been tested extreme versions of the types of risk that are beginning obviouslybut we will watch it with interest. >> good morning. how worried are you about the week possibility a routing bank buffers over time medium-term moving forward. [indiscernible] in order to ward off that risk? mr. carney: your question is very on point because it is a pra.rn of the ftc and the i referenced very briefly the type of stress tests we were going to perform the year. we were going to perform two. the second one, by any old exploratory scenario, something that looks that risk at the medium-term and beyond. what we intend to look at is exactly this issue. which is what are the factors affecting the profitability of banks, what if we are in the low interest rate, low growth environment for a time and what orps are the banks taking current strategic plans consistent with a return to operational -- a return to returns and to maintain resilience over the medium to long term. are they accreting capital or shedding capital, what do they need to do? we are aware that the profitability of core retail banking in the u.k. is quite solid. it is double digit once you adjust for issues such as misconduct costs. the profitability of investment banking activities for many of the firms is challenged, but there are steps potentially that can be taken to redress them. there is also issues in terms of ir footprint both , the structural reforms that are coming with the independent commission on banking, the ring fencing of domestic inks, and firms will have to take into account how they might adjust to our new relationship with the european union. these issues of profitability are not an immediate concern. there are medium to longer term concern for financial stability and that is exactly why we will be going through a rigorous exercise over the course of next year. reporter: good morning. james burton from the daily mail. one of the things you highlight is the level of household debt. talk is more detail about indebtedness and whether you have any worries that the low bank rates could be [inaudible] we highlight it for a reason because it is something we watch closely and this is a risk that has to be managed and we have various tools with which we can manage it. it is important, we think it is important, to put it into context. u.k. haveolds in the since hard over the years the crisis to pay down debt. so they have delivered quite substantially since the peak levels of the crisis, more than 20 percentage points of debt to income. processcess and in that , the number of highly indebted -- one way i think of identifying those are people who are paying more than 40% of their income on debt service. historically, that is the level at which if you get a bit of a shock to your income, you lose your job for a bit, some unexpected expense, that is when people have trouble. is a limited margin of error. that percentage of households and it is detailed in the report has come down quite significantly as well. people have worked hard, they are in a much better position. said, debt is relatively high still. and households have been running down their savings and we are starting to see for the first ame every leveraging -- re-leveraging of households. why is that happening? to the extent to which it is mortgaged debt and it reflexive turnover and people are buying more of a house prices have been going up over on average so that re-leveraging is natural. to what extent is it consumer credit? what we are starting to see for the first time is it is the watching thatare closely. we are looking at the balance between so-called unsecured debt between auto lending which is secured and what we have been seeing up until now and the unsecured debt, credit card debt which asserted to pick up. a is the early phase of re-leveraging following a long time of improvement of the position. weis one of the reasons why have kept in place the restrictions on high loan to income mortgages and kept in place the affordability tests so we do not end up as an economy with a large proportion of households with very high debt to income ratios. you asked a question from the perspective of interest rates. thatood thing is, is households and businesses, young family starting out who are looking to buy a home, that they to credit, and they can get it on quite competitive terms. that is necessary for the economy given the headwinds the economy is facing. of that credit is the decision of the monetary policy committee. ,he terms around that credit and the underwriting standards associated with that are the interests of the financial policy committee, and we have different tools that can help determine and ensure that the underwriting standards that those underwriting standards are responsible, they are going to people who are likely to be able to pay off his debts. it is not do anybody of favor, the individual, the bank, or the system as a whole if we slip into a position where that discipline is lost. what we have done is we have reinforced it, we have used these other tools so we are able to get the right balance of stimulus for the economy during of adjustment and ensuring that underwriting standards remain brady are. we were going to -- we are going to remain vigilant around the standards because we have seen this shift. reporter: i wonder how worried are you about president-elect trump electing some of his threats, if you like about trade, and what impact that could have on financial stability here and across europe, specifically nafta or tariffs against china. what happens if we cannot get contingency plans and a transitional agreement, what is the worst-case scenario mr. carney: we reference it in your first element of your question which is around trade. we reference it in the report that there is this possibility that the slowdown in the growth of world trade, which we have seen over the past few years accelerates. it accelerates because of discrete policy initiatives potentially from the world's whilet economy, and that might not directly affect the united kingdom, if it slows the pace of global growth, we are an open trading nation, it is going to have an effect through this economy. that thed to imagine impacts of these types of decisions, if they were taken, would be greater than the stress that we did to the global --nomy in this report, so just to remind you, we had almost a 2% fall in global gdp in the report -- so this is burn issuelow headwind for the global economy. anchor: you are listening to governor carney talking about issued earlier today. if you want to carry on following him on your bloomberg live is where top you should be heading. the governor talked about the issues surrounding chinese debt and this cliff edge that could be coming for u.k. financials. it depends on the brexit exit. let us take you to the market open and show you what is happening and how these european banks performed. this is the european open. we are expecting a slightly positive start. the ftse up by 0.1%. ont i want to do is move you to the european banks and how they are stacking up today. this is the story. rbs is trading higher. trading by 0.4%. barclays rising as well. giving back a little bit 0.2%.und, down by that is the roundup for the european banking story. governor carney talks about the u.k. being the investment banker for europe. if you want to listen to what he is saying and the questions being asked and answered, life live on your bloomberg terminal. patrick is with us on set. he sees -- he is alongside michael moore from the banking team. michael, let me start with you. the big headline that came out initially was what is happening with rbs. how big a fail was it? basis,: on a percentage not a huge sale. compared to all of the others, short ofl came in short of their higher hurdle even after taking management options. they fell short on the leverage ratio, so this was a fail and they had to agree with the pra on an updated capital plan to remedy that. we don't have all of the details of that. it involves cutting costs more, shrinking more, selling off loan portfolios. this is going to cause more action for them. guy: does this justify the results of the stress test to dispose of what is left of barclays africa operations? michael: i think it does. even though barclays fell short before certain actions on their capital ratio, the pra said they are taking into account what barclays has already announced including the africa state sale in not forcing them to revise their capital plan. the pra saying barclays is already out ahead of this and that kind of backs up staley's plan. the want to come back to share price, which is over 2%. big questions surrounding rbs like torture. we don't understand the -- like deutche. do you think they would have had to tell the bank what kind of number they are expecting and easing the bank would be prepared to repeal that? this is a very delicate matter. if we were to ask governor carney right now what number did they tell you, do you think he would be in a position to tell us? michael: i don't think he would be able to say that but they did have to provide an estimate for their overall legal costs makes that did forward and that would certainly include the r&b matter. included in the test. from what i have seen, the bank of england has not disclosed that number, but certainly, it contributed to the decline in their capital ratios. guy: how would you assess the banking sector right now? patrick: hsbc has different risks. it is exposed to china and the potential housing bubble there. it has a sustainable dividend -- thative disasters in investors -- it was at 15% at q1. it has issues. the bank of england is taking encouragement that plans are being put in place. i don't think there is big systemic risk but a real value proposition that the banks are less expensive. it is more continental europe. guy: we'll come back and explain the continental banks in just a moment. let us focus back in on the hsbc trade. governor talks about the andaordinary levels of debt he says, even further developed markets, this would be sensationally high. does that not were you? patrick: he seemed to stress that, -- does that not worry you? patrick: he seemed to stress that. the housing in china is being called a bubble. aggregate debt is 280% across corporate financials and various consumers and government so it is high, not out of line with the developed world, an economy that is growing, so it grows its way into debt better than the developed world. it creates risks but there is growth in china. guy: the governor talks about he global risks and he said senses the problems for u.s. banks on the global level, but nevertheless he also faced a number of questions surrounding brexit. it seems to be we simply do not know. he says it depends on how this is ordered and is sequenced, how orderly it is. the brexit process is going to be important for u.k. financial institutions the problem is, you do these tests and don't know what the process is going to look like. michael: the tests started before brexit and did not specifically include that although it had elements of it including house price decline, it is a major question for the banks and the big issue is the transitional agreement. orl it be a two-year window will banks have four to five years to get their house is in order and make the changes they need to? the banks want more time. carney seems to indicate that would be a good thing, but that will come down to the political negotiations. guy: the political negotiations are going to focus on what is important for both sides. did it feel like a veiled threat? he talks about the fact that london is invested in the banker for europe. that is underwritten. for the exchanges cleared. when you think about the magnitude of what he is saying, he's basically telling them up, which he has been saying very clearly, that you will suffer more than us, that fat may not be true. -- that that may not be true. been a consistent theme coming out of london is telling europe, don't cut off your nose to spite your face. there is an economic impact on europe if the u.k. banking system is disrupted, and you have heard that from the banks consistently, carney echoing that today. guy: patrick, when you look at what is happening with the u.k., is u.k. data, the issue important. everyone seems to be having serious concerns about the ability to deliver brexit within the two-year time horizon. everyone concerned about this cliff edge. when you try to understand the parameters of what the u.k. and europe is dealing with here, is the cliff edge becoming an increasingly important issue in that thought process? patrick: when you think about the speed europe does anything, a two-year deadline, it is incapable to get anything done. it is inevitably going to be pushed back in some way. the risk is if you wait until you are right before the cliff to push it back which is what has been done and a number of issues , european issues. the banking system and the clearing an investment bank, that is the one that is not a two-year fix. if you slowly migrate things to frankfurt and dublin and paris, that does not happen quickly. it creates a lot of risk. you have got deflationary concerns if you see a slowdown in the velocity of money and investments, those come back to the fore. if article 50 is triggered early next year, as she was planning, there's questions on that now. guy: question to the governor on how the story has changed as a result of the trump election in the united states. how much has it changed for the u.k., for the financial sector? when increasingly appears to be happening is that my sense is having trouble around lately, is we are not worried about frankfurt and paris. we are worried about new york and that is where the real problem good lie for u.k. financials is the battle between the u.s., new york, and london. michael: the middle ground, the english-speaking country. there is a lot of risks facing the banks in england, especially the global one, the global players. it is uncertainty, a were that is overused, but no one knows where will come from really. guy: it is not across the channel but the atlantic ocean? michael: certainly, if you have a splintering in europe, you will see a lot of banks want to consolidate operations where they can to get some sort of -- guy: does it become easier under a regulatory point of view under donald trump? michael: that is the expectation is he is going to roll back at least parts of the regulation on the u.s. front, so new york there is againer if splintering in europe. guy: let us take you back down to the bank of england, to the press conference and listen in a little bit further to what governor carney has to say. mr. carney: everything is not agreed until it tends to be the last minute. and then, to expect that firms are instantly ready the minute after, for those new arrangements forces those firms to make decisions without full information well in advance, which goes to your question. >> martin arnold, financial times. governor, where does the health of the eurozone banking system rank in your panoply of risks that are out there, particularly with everything going on in italy at the moment? and given all of the risks that you presented to the financial system, which seem to be rising in your opinion, how disappointing is it that you have had three banks fail the stress test this year? thank you. mr. carney: in terms of, well, the first thing is that we judge that this principle risk -- main risk to the u.k. is global. we do reference the risk from the continent including from parts of the eurozone banking system. riskis more a real economy that it is a financial risk. let me explain that. you reference the italian banking system. there is well-known, well-documented issues there. the exposure of u.k. banks to the italian banks is very low. it is very low as a proportion -- >> that exposure to the italian financial sector is less than 1%. thecarney: yeah, so exposure to italy itself is on ,he order of 20% of cet1 exposure to a telling credits as well. exposure to the banks, extremely low. exposure to italy, manageable as well. it is important to put that into context but there are scenarios where there could be strains and that could have knock on effects year. test,ms of the stress this was a very severe stress. you had stress in asia, in europe, here in the domestic economy, knock on effects in the financial system, and we have layered on top risk scenarios for conduct costs as well that hit the capital. in that context, as we were going through the stress test process and this was a year-long process, as we were going to the process and the banks were working through, there were three of the institutions who could see the direction of travel and took actions of their own accord to bolster their capital position. and we have accepted those plans, so when we made the final judgments on the stress, which was yesterday, we accept plans in the context of those plans. we are pleased to see the banks are going to be in position to have resilience consistent with what is a very -- consistent with their ability to withstand a severe shock. saying whatish my does "withstand" mean? borrowing business loans in the economy in that scenario. the banks grow lending despite being hit by all of these shocks and that is what we want to see. we don't want to see, obviously if you have a global recession, you have pressure here, demand for credit goes down, but we don't want people to be in a position where they have a good idea, they want to move to a home, that cannot get credit because the banks are too weak because that perpetuates the situation. that is the standard they are being held to end a position to meet. >> just expand very briefly on one thing that mark said. bringing together the european part of your question and the stress that is part of your question, one way to think about 105 billione impairments in this stress test. that includes severe euro area recession. 5 billion is from the euro area. the gives us some sense of level of exposure to u.k. banks in the event of a severe recession. wanted to add one point on the european banks, which is some of, well actually, governorthe referred earlier, the profitability of u.k. banks, those issues are also present in the european union. business model issues for banks, the ability -- you see it in the share prices, the ability to generate capital, the ability to withstand shocks. those issues, those long return issues don't exist in the european, in the euro area as well as in the u.k. and that is something we thought they should be aware that they have to tackle. it makes them more honorable to risk. -- vulnerable to risk. , how confident are you that all of the risks in terms of capital are in the stress test, by which i mean, in terms of basel 4. guy: we will listen to that later. havetress test results been delivered by the bank this morning. still with us, patrick armstrong. let us all about the continental banks. we have seen unicredit's cbs rising sharply over the last few days. the italian banks firmly front and center at the moment. the governor talks about the fact he sees it more as a real economy risk. is that the right way of approaching it? is lots of risk with italian banks. until we know the impact of the vote, itwe get a yes is good news for the banks in the short-term. we think renzi steps down but you don't get to italian governments. you are stuck with a muddle through. it is not an ideal scenario, but it does not have the big systemic risks people are worried about. guy: at us talk about profitability. concerns surrounding the profitability of banks. one thing that would improve the profitability is a steeper yield curve. we have seen evidence of that coming through already. i talked to the governor of greece -- in greece. how steep do think the curve could get and therefore in terms of the plays we should be watching as a result of that steepness, where is the best ways to position cash? patrick: u.s. banks would be the place if you want a steepening yield curve. that is actually what is driving steepening of the yield curve in europe as well. it is pulling up 10 years around the world. it goes from a headwind to a potential tailwind even with the yield curve where it is now. in the u.s., it is quite attractive. it is making it europe viable. you have always had reasonable capital levels. you there -- there is a potential for -- the potential for profitability is on the horizon now again. the steeper yield curve is aghi mentions every time he speaks. it is something he is trying to address. it is not easy for him to do with the policies he has in place. it will be a bank friendly extension of qe he is announcing in december. guy: let us talk about duration. how steep does the yield get? how much more potential for a selloff do we get? patrick: it was something we have been positioned for the whole year. for the made us right year. if you think about what 10 years normally are, you take a country's economic growth plus its rate of inflation and that .quals it 10 year bond rate that puts the u.s. at 4% by the end of 2017. met is really where fair value for the treasury -- i think we will touch 3% next year. maybe a little bit under 3%. guy: the risk is up or down? 3.5%? dependent onill be how much the house supports the of the structure plans that donald trump is going to put forward, i think. the tax cuts are a near certainty. i cannot see how the house does not allow that. big that it deficits for infrastructure, they may have questions about that. budget deficits for infrastructure, they may have questions about that. guy: one factor might be what is happening in the oil markets. let us turn to what is happening in vienna right now. opec output production is in question as iran and saudi arabia reject offers. the nigerian it petroleum minister told bloomberg there is a lot at stake. >> i want to be optimistic. everyone relies on one central thing. if we don't do this, the price of oil will go up. -- the price of oil will -- that, i mean, everybody sort of sticking to their guns and playing hardball, but at the end of the day, the unity will converge. if we need to have -- we will. be leader theo somethat there will not be level of agreement. i think we will find our way around it. guy: interesting interview. recorded conduct -- annmarie hordern conducted that interview and joins us on the phone. >> they are far apart in terms of what we are hearing. the nigerian oil minister said it is not as bad as it seems. the the iranian left to hotel, he said his expectation for the opec meeting was that they would not cut or freeze and the saudi's essay they will walk out of the vienna without a deal. guy: what happens if that happens? what happens if we don't get a deal? >> no one is really sure because his last year has been quite crazy when it comes to opec meetings, but if we look at history, when talks collapsed in april in doha, it was months before there was a deal. there was other meetings, doha twice, the stumble, abu dhabi. they have been -- istanbul, abu dhabi. what basically happens, if the price of oil does collapse, you better believe opec will continue talking to each other and we will see an emergency meeting early next year. walk me through the timeline for this morning. morning, they are at a pre-official meeting. it is not official, it is off the record. at 10:00, local 9:00 a.m., london, they should be heading into what they call the magic scrub where media can talk to them before they have a meeting. it could go late. usually, the meetings are not that long. it's interesting to see how long they stay in there and if they can come together and get rid of these differences and strike a deal for them. if not, what oil today. anything these ministers say, the price of it moving is very volatile based off this meeting. great stuff. we will make sure we cover every twist and turn here at bloomberg. go to your terminal. you can cover what is happening at the bank of england right now and what is happening at opec with an ongoing blog giving you every twist and turn. patrick armstrong. you say every open deal is an opportunity -- opec deal is an opportunity to short oil. there has been a bit of pessimism around oil. i would rather wait until some sort of deal is struck. it is not going to be a material view. you may get some sort of freeze agreed to and there will be subtle cheating on that in the quarters to come. even when opec was a functioning cartel, it was still saudi arabia was the swing factor and they are the only ones who really want the cut and everyone else says we want to cut from opec, but we are an exception. guy: donald trump is very pro-energy. patrick: you will incentivize shale production. exactly. it is profitable at $50 for shale production. opec will succeed in the short-term. that is just going to incentivize shale production and it is almost a self-defeating. they have 33 million barrels a day out of 96 million barrels a day being demanded. it is a small chunk. it used to be the swing factor that they could turn on and off the taps. guy: the saudi aramco ipo? patrick: i don't know enough about the valuation behind it. guy: saudi arabia needs to talk up oil right now. patrick: certainly. aramco ipo, that is probably just as bigger reason as the cash flow they are getting. was interesting. oil did very well as they were pushing the bond through. i wondered whether or not you could position for a similar rally on the assumption that the saudis need to have a high oil price. patrick: they can talk up oil in the short-term, but not the long-term. they can push the market in the short-term. guy: picking oil prices is a dangerous game. are on ae is that we downward trajectory. the slope is down. patrick: it is down very slightly. there is not much upside from here because it is elastic. you get new production as soon as prices move higher. it is a pretty well-balanced market with a high level of inventory overhang. the good thing about shoring oil is a get paid to do it every month. very high carry strategy where you get a number of factors. prices really spiking. we need to talk about what is happening in italy and what is happening with renzi and this facebook live address that he had overnight which is a something to pay attention to discern whether it was a poll on wednesday or not. governor carney and his team are speaking still at the bank of england and we will come back and deliver the details of that event as well. oil and the u.k. banks and focus today. -- in focus today. ♪ mr. carney: there will be changes to reforms where appropriate. guy: governor carney entering the final question in the bank of england press conference that is being conducted on the road in the city of london, addressing the issues of stability surrounding the u.k. financial sector, the u.k. banks in particular and the stress tests that have been carried out. rbs have taken immediate action concernsith the surrounding its business, but nevertheless, stock has come under pressure this morning. the governor appointing hissing or at the global risks rather than domestic, which is interesting, surrounding the financial sector and maybe also highlighting the fact that london, the city of london, is an important aspect of the way capital is raised in europe. effectively, london is the investment banker for the whole of europe including the eurozone of course. that is check in on the market to see how things are looking right now. as you can see at the moment, european headline indexes have risen so we have the 600 up, the ftse writing as well and the dax has risen 0.3%. the performer this morning is the cac, breaking up. conference has now wrapped up. that is a deal with how some of the stocks are performing. let us deal with the details. yousef gamal el-din. the stock down almost 3%. it has clogged the early losses but down 2.8%. they submitted a new plan to address some of the deficiencies that were found as a result of the stress test and among those include cost-cutting, reduction in assets any sale of personal and commercial portfolios. up the stoxx 600 bank index, up 0.25%. we are seeing big moves in oil. that is helping to raise the overall stoxx 600. this is on slightly more optimistic out put i would say. the an eye changing by the hour. oileard from the iranian minister. the question of course is that this is going to be a face-saving deal or will it have any meaningful impact. guy: thank you very much indeed. about us turn to what is happening in italy. italians will vote on a constitutional referendum on sunday about what could be the political and economic fallout from a no vote. matteo renzi may resign from office. for could see some support the eurosceptic populist five star movement, the party which wants a referendum. the business lobby wants the economy to -- according to the business lobby, the economy could fall into a recession. renzi has made an appeal to undecided voters in a more than one hour-long facebook live session. the last time we checked and we have been checking quite hard, the video had more than 60,000 andents, 8.6 thousand likes 3.9 thousand angry faces. this is what we are coming down to. 2.7 thousand -- 379 cries. this last week, we are not allowed to do any polling. read into that what you will. let us get to our bloomberg news reporter. john, what was the objective here? i thought it would be mainly people who supported run the that caulked into this -- renzi that clocked into this. >> it is renzi's strategy in the last days of the campaign. the opinion polls before the ban on publishing them came into force on november 19, those opinion polls show that up to quarter of italian voters had still not decided so that is where there is room for maneuver. he went after the undecided and made an explicit appeal to members of the opposition, supporters of opposition parties, the center-right, the anti-establishment five star movement and the northern league is that is where he thinks he could make a difference. he iss there a youth vote going after orders facebook broad enough that we are talking about a fairly wide demographic? patrick: -- it is >> a wide demographic, but it is trying to go after the you throw. more broadly than that, he is trying to put his point of view to people, to voters, without going to the media or press conferences. twitter,using facebook, and is a quite often. guy: what is the assessment of the market? what is the assessment in italy right now, what happens if he loses, and what happens if he winds? wins?f he if it is a big loss, then x happens. if it is a small loss, then y happens. >> how long have you got? it does depend not only on the three or defeat, but on how wide the margin is. if he went, he is expected to stay in power. there was a theory he might call the elections but that was denied by his office. if he loses, that is obviously the more, the bigger source of uncertainty, the impact on bonds, stocks, currencies. how longr call as to that instability would last. from a political point of view, the car dealer -- the cards would be in the hands of the president. it is his job to appoint a premier. when a friend these fellow ministers has already said -- one of renzi's fellow ministers has already said that -- we will see whether he insist on resigning, stayed on, has a new government, passes the bat on to another figure or even possibly early elections. guy: you will have a busy few days. thank you very much indeed for coming to talk to us this morning. patrick armstrong from investing managers still with us. the ecb has a meeting on the eighth. how affected do you think that meeting could be with what happens in italy? patrick: the ecb is ready to probably do something a little bit more proactive should there be some instability created from this. at minimum, an extension of the asset purchase program and we may see a bit of a twist towards increasing the purchases of the periphery countries that really do need the benefit more than germany in the asset purchase program. guy: we are getting a fairly big move in oil. i have got the spread. iran says it will not freeze output. there is another arrangement. iran oil minister says opec is close to a deal. the iranian minister says they will reach an agreement. the opec breakfast meeting was good. let us show you what is going on here because this seems to be a curious reaction. this is the iraqi oil minister saying the opec meeting was good. iran is saying opec will reach an agreement. the iran oil minister says they are close to a deal but there will not be an output free from the iranians. anotherll be arrangement. what that means, i don't know. take a look at what is happening with oil. a fairly big reaction to the upside. it seems there will be a deal. as patrick has indicated, these has the tradedry you get these headlines and oil pops and actually the reality of the structure of the deal -- i wonder whether the iranians are hinting about that. there will be another arrangement for that to be not so as he had first thought. what i: that is exactly expected that there would be a deal, not a cut. there would be a freeze but iran is going to get to its 4 million barrels a day. rightat the .7 million now. saudi arabia is the country that would be willing to reduce production a little bit but they are not going to get anyone else on board in a meaningful way. a lot of countries are producing near their capacity right now so a freeze is not heard them. guy: if you were not sitting here next to me, and you were in front of your bloomberg at your office, -- patrick: i will be shorting it once the market opens. it might have another percent. it is the perfect time to be shorting oil. foret about a 4% premium that and then every month, there is a cost on oil of about 3%. oil has to go 7% in a calendar month for us to lose money. it is a very effective carry strategy. if they move higher by 3% to 7% in a month, -- guy: it keeps rising? patrick: it fell down to 30 in the summer. guy: it has picked back up. patrick: a big premium to sell over the upside. risks, things like that, could lead to a spike. the economics where they are right now, oil can get to 50 very easily but it will have -- guy: is it inventory you are relying on? patrick: the supply response. you have a high level of inventory and production going back on stream that is being shelved in the short-term when oil is down in the low 40's. guy: they are talking about another arrangement. i'm trying to figure out what that is. your sense is that even if there is such an arrangement, it will be fragile. patrick: it is fragile and more of a freeze than a cut. the thing that changes is -- guy: the freeze does not change anything. when does the balance happen? patrick: you get u.s. economic growth, creating higher demand. demand growing at 2% per year. guy: the u.s. economy picks up, the shale guys will be drilling. patrick: there's lots of supply there. there's billions of barrels in the ground everywhere and people are doing the math that they have maximize short-term revenues from this oil because with technology advancements 100 years from now, what is oil going to be used for? people don't know how much and 50 years it will be changed. guy: patrick, stay with me. still more to come. we are dealing with the open. at the open has been an interesting one this morning. we have got what is happening with the u.k. banks, the oil story, and warming up to what is happening in italy. we have not talked about india yet. the rupee repeal. we are in mumbai with the latest. this is bloomberg. ♪ guy: welcome back. breaking news. oil has been spiking higher over the last two minutes. take you back a couple of days, we are back to where we were a couple of sessions ago so let us not read too much into this. the oil ministers have been meaning for breakfast -- have been meeting for breakfast. they have been pointing to some sort of deal from that meeting and it looks as though that is not going to take the form of iran cutting. it will be some sort of other arrangement. we will wait and see exactly what the details of that ultimately look like. they will go into a formal meeting which starts at 9:00 gmt and hopefully later on, we get more details on what this potential deal would look like. we have seen a spike. it is becoming very familiar territory, this expected deal spike, and then the market starts to deal with the details of what is coming out. that tends to be a slightly different story. we will work our way through the morning. let us turn from iran to india. rather than highlighting the economy. administration, did figures today may underscore just how much there is to lose from these shock clampdown on cash. indian stocks and the rupee are set for their worst november performance in five years as a grapple with the 500,000 rupee notes which is more than 80% of the nation's currency. let us find out what is going on here and what is going to happen next. drive --e monetization de-monetization the strategy scuttled the growth story? that me put that in context, the eighth of november, the prime minister announced a withdraw of 500,000 rupee notes. the goal was to squeeze out fake currency and black money of unaccounted wealth from the system. execution was flawed. you have seen people standing in ueues. small traders and businessmen have been hurt the most. a large part of the population that does not have access to the banking system have been reliant on the cash economy and have been highly hit as well. no one knows the economic impact of this on india's gdp in the long run which is why you are seeing analysts cut back on their forecast for the financial year. is large method out there one of uncertainty that has crept into the story. guy: what our markets saying about the growth? how our markets dealing with all of this? -- are markets dealing with all of this? >> you are seeing recovery in the stock market. volatile also has been but the larger point is the key question is when will normalcy return. it has moved away from economy and jobs to help do we deal with demonetization. experts point out this could take as much as six months for 22 billion bank knows to be replaced. in the near term, we are basing ourselves -- watch out for the bank of india. in with a measure to suck out liquidity's by asking -- the governor may be under pressure for interest-rate. 25 basis points or more may be cut by december. guy: thank you very much indeed. armstrong us, patrick . i have heard content about the indian economy. substantial. i have heard concerns about what is happening in china. patrick: in an environment we expect the fed to begin hiking rates and continue that he the next two years, the strong dollar and the protectionism that trump may put into place. that is a big risk. i think china actually was also where it last year and coming into this year, i see more risk for china coming up that i did a year ago when everyone was talking about it. i think the leverage, the housing bubble there, and if you do see protectionism from the united states, that is a big problem for china. coal producer, great. copper is a trade would put on a couple of days ago. i think some of the trump trades have gone too far. much, andso oversupplied market. there's going to be more produced them demanded. copper should go up based on that. by the time you choose where you want to spend, implementation, -- as copper prices move up, that will advance production. it is an oversupplied market and prices are ahead of themselves. guy: stocks overbought now? sciosciai'm not on the stocks. we are short copper -- i am not so sure on the stocks themselves. we are short copper. generally, -- guy: the bond market has further to run. patrick: that is what i think. the bond market going, higher interest rates. you have to discount the future cash flows at a higher rate and that compresses multiples. earningsing to get and growth, stimulus, but lower multiples eventually from the higher interest rate that come. guy: what is the long run right now? patrick: biotech. that is a trade we think has legs. the deregulation there is a high-growth area. consensus, 14% revenue growth for the biotech companies trading at 18 times earnings, a very small premium. european industrials, we think there's going to be economic growth. the european industrials trading at 30% below u.s. industrials, and getting a yield of 2.5%. is going to be capital spending. not just from governments but from private and residential's, all of these things, there will be more capital investment going forward and we think it has been an area that people have deferred decisions for a long time. guy: whatever it is does not work anymore. patrick: exactly. overall, we are long in europe, america.erest rates in food and beverage, short utilities there. we like biotech and technology in the united states. those are sectors growing. guy: think you're a much, patrick armstrong. -- thank you very much, touch of armstrong. german data coming out. the unemployment figures coming through. the real story is what is happening with oil. bringing up and will chart for you. oil has spiked after this breakfast meeting in the other. formalnow going in the meeting. this is probably the story for the rest of the day. if you want to cover it on your bloomberg, -- o>. can get live guy: welcome back. you are watching the open. i'm watching my bloomberg to see what the german data looks like. unemployment gain and line with expectations. we will start thing maybe wage growth picking up and retail sales have picked up nicely. that us see what is happening in terms of the markets. zero point 3%. at euro-dollar flat. rbs down by on1.88. brent breaking higher. 4.2% after a a breakfast meeting earlier on in vienna delivered a outcome the market was not prepared for. we could see some sort of deal. that is not may be in the form we first thought that would include some sort of iranian cut or freeze. we'll see some sort of deal. the formal meeting is minutes away now in vienna and we will watch what happens as we work our way through the morning on that trade. this is very familiar territory. rumors and speculation swirling around vienna that a deal gets done. we saw this in algiers and delhi as well. doha asnot happen -- in well. it does not happen. we'll see how the day progresses if the deal is delivered upon. we see volatility spiking when it comes to the oil prices. anyway, that is it for me for now. i will join the bloomberg radio team. our next, it is "surveillance." radio, now in london. ♪ francine: salvaging a deal. opec climbs as iran says will reach an agreement today. the cartel remains divided. we are live for the meeting. testing times for rbs. it fails the toughest ever stress test. mark carney ones that profitability is a long-term problem. carney says the biggest risks are global, underlining the italian referendum, european elections, and china as key threats.

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