>> good morning. we are live from our european headquarters in london. cash rate is less than 30 minutes away. -- cash trade is less than 30 minutes away. deal.s 11th hour the populist government passes its budget, but could the troubled coalition be on course for a breakup in 2019? a good end to a terrible year. amid lowcks rise volumes after president trump reports big progress in trade talks. china's slowdown deepens.

manufacturing pma drops to the weakest since 2016. good morning and welcome to the program. is one of the -- of the markets over this holiday period. produced opening hours also a feature. these are treasuries. remember in the u.s., in normal stock market today, but treasuries trading half-day. london will be open and euronext will be open. let's get through that. let's have a look at the gmm. thin volumes in the asian session. this is what we see him standout moves in the asian session. we have the hong kong market and the us trillion market open. closures in china, in japan. the hang seng over in hong kong is bouncing, is positive.

futures in europe and the united states pointing higher. donald talking about progress in trade talks. we have had week data out of china. the week pmi number. it is a contraction, the weakest we have seen since 2016. the asx are electing -- reacting negatively. global stocks hit their worst year since 2008. in terms of the commodities market, another bounce in oil prices. the general path has been negative. 1.5% -- byti up i 1.5%. has approvedament a revised budget for 2019 amid opposition complaints that it was dictated by the eu. the country's populist government originally vowed to push through costly campaign promises including the universal basic income. under a deal struck with the

european commission last week, italy agree to lower its planned budget deficit from 2.4% of gdp to 2.04%. joining us from rome with the latest is bloomberg's western european editor. very good to have you with us. interesting developments for italy over the weekend. the budget has been settled just in time for new year's celebrations. is everything fine? i'm guessing not. >> the budget has been settled. there is still a lot of questions hanging around. the main one perhaps is the economic growth foreseen for next year that has been lowered from the earlier projections. and there is this rivalry within the coalition government between and theremier salvini other deputy premier demaio. anna: tell us about how that relationship might develop.

this government has survived 2018 despite expectations it might fall apart. with salvini surging in the polls, does it hold in 2019? >> that is the big question. salvini is pulling ahead. he is a dominant figure in this coalition government. there is speculation he might like to trigger early elections sometime next year to put him in the driver seat. keep an eye on salvini's popularity, how he is doing in those opinion polls. the european commissioner in charge of economic matters flagging the brussels is going to be watching carefully the implementation of this new budget by rome. is that something that's going to be -- it would be appreciated by the populist government i'm guessing. >> of course it won't be appreciated.

the populist government is looking forward to some of its expensive programs. but the eu will be looking over the shoulder of the coalition partners to make sure all the promises that were made to brussels are kept. ,hat's going to be difficult particularly if the growth comes in lower than everyone had been hoping for. kevin,hanks very much, bloomberg's western european editor. let's get a bloomberg first word news update. >> china's slowdown deepens with activity at the nation's factories slowing. the official manufacturing pmi came in at 49.4 compared with the average economist estimate of exactly 50. it was the first contraction in the factory gauge since july 2016. the manufacturing pmi beat expectations at 53.8.

u.s. equity futures rallied after president trump reported progress in trade turks with -- trade talks with his chinese counterpart. trump tweeted a deal is moving along and will become perhaps it comprehensivel be if made up. the government's weeklong standoff with european commission. coalition partners agreed to lower a 2019 deficit target to 2.04%. the initial target was rejected by brussels as breaching eu laws. of the u.k. leaving the eu are 50-50 of parliament rejects theresa may steel. eut is according to international trade secretary speaking to the sunday times. he called on fellow lawmakers to back the deal saying he would rather have an agreement that falls short of expectations then risk no brexit at all. a crucial turkey have

role to play in syria according to a message from president vladimir putin. this comes a day after the country's top defense and intelligence chiefs met in moscow. they agreed to coordinate military steps to fill the void left by donald trump's decision to order military pullout. ruling party has won by a landslide in an election marked by violence. according to the nation's election commission and its seats.won almost 90% of the opposition has called the vote farcical. as many as 18 people were killed in poll related violence. this election gives the prime minister an unprecedented short-term in office. south korea says kim jong-un

wants more summits to resolve the nuclear impasse. president moon jae-in's office says the north korean leader said a personal message of well wishes over the weekend. willing to meet more often to achieve a nuclear freeze on the korean peninsula. global news 24 hours a day powered by more than 2700 journalists and analysts. this is bloomberg. anna: thank you very much. one of the stories she is talking about is the slowdown in china. china's slowdown deepens. manufacturing pmi dropped to its weakest since 2016. we look at what is hitting this coming up next. bloomberg radio is always available on your mobile device or on dab digital radio. tune in on any of those devices. this is bloomberg.

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anna: welcome back to "the european open." reducedbe no doubt volumes as we have seen in asia. not all the markets in europe will be open. we are expecting to see a bounce at the start of the european trading day.

we saw the hang seng trading higher on the back of positive trade talk. more details on that shortly. for the moment, let's get a business flash. for the second year in a row, goldman sachs is set to be the top bank for takeover advice. it's share of global deal making is set to exceed 28% for 2018. morgan stanley, jpmorgan, citigroup, and barclays round out the top five. after a strong starts 2018, deal volume fell short of the $3.4 trillion record set in 2007 as market volatility put takeover aspirations on hold. china has ended its freeze on video game licensing. beijing is said to have approved 80 new titles for commercial release. a chinese gaming executive told the financial times it could take months for officials to

clear the more than 5000 games waiting for approval. extendedprosecutors carlos ghosn's stay in jail until january 11. another setback for the fallen auto executive who has sought bail to start mounting his defense. ofstands accused understating his income by tens of millions of dollars. verizon have reached an 11th hour deal to keep sports programming flowing to cable customers. the distribution agreement covering 4.6 million customers was due to expire on new year's eve. ae negotiations were seen as litmus test for disney's business model of charging higher fees for espn. even though many consumers are switching off sports. deutsche bank is well positioned to weather a recession without state help. that's according to the chairman speaking with a german newspaper. he said the company has a very and highpital --

liquidity. the lender is closing out a rough year amid a sputtering turnaround. that is your bloomberg business flash. anna: thank you very much. a painful 2018 for markets around the world. stocks have lost 20% of global gdp. trillions have been wiped off global equity markets. a number of indexes have fallen into a bear market. with further insights, dani burger is here to wrap up the year that was. take us through the pain train. >> i'm starting with the markets falling into a bear market. we saw the bears predictions come to fruition. here i have a couple different assets. the beginning is their peak for the year going into very market territory. the real standout is in the blue. oil fell more than 20%. a lot of this is opec concerns, supply concerns.

although we have seen energy stocks have less of a sway on global equity indexes, still other industries falling into the bear market. in the red i have the nasdaq. over the past week, that sharp 5% rally help to get it out of the bear market. still just on the line there. the other lines, we have japanese stocks, we have u.s. financials, which have fallen more than 20% for the year. one of the remarkable things here is the ratio of global market value now looks like compared to the gdp. we have seen a 20% haircut in that. a lot of that happening over the past month. this is a 17 trillion reduction from the january high in market a sharputting us at drop that caught investors by surprise. the more retail passes are hedge funds that saw the most closures in over a decade. the other group that got caught by surprise this year was the south side.

here i have the community year-end target for the s&p 500. the white being what the s&p 500 actually did. check out what happens at the end of the year. s&p 500 is ending about at 2650. analysts thought it would end higher than 2900. that discrepancy on a point basis is the widest since our data goes back to 2000. take that with a grain of salt. at a higher level, that differential is going to grow larger. the final chart, a really important story. cash is back. we saw three much -- three-month treasury build. exceeding the s&p 500 earning yield in some circumstance. the return of those once a three-month bills is in the yellow. it actually outperforms investment-grade and high-yield, the other bars, which have fallen for this year. there is no alternative.

that is seeming to be dying which is why we have seen investors move into cash. anna: thanks very much. dani burger with insights into the year that was. one of the big things has been trade tensions. let's talk about what impact this is having on the chinese economy. china's manufacturing pmi dropped to the weakest since 2016 and below the level that denotes contraction. the threat of a prolonged trade for dampened sentiment and stimulus struggles to gain traction. joining us from hong kong, jodi schneider. how is the threat of prolonged trade war affecting china's economy? take us through the latest data we have seen. >> so basically it is really having an impact on factory orders that corporate sentiment is being affected by the trade war and the risk of a prolonged trade war.

that really is starting to show up in those factory orders. the numbers you mentioned a moment ago show this. factory orders are now in bearish territory. they are in contraction territories. we saw that with that big important number but also some other indications. such as new factory orders and new export orders. signals we have been getting in past months seem to be clear that china's factories are feeling the effects of these trade war and this really risky sentiment. also stimulus has begun, but apparently it is not enough for has knotted -- has not had enough traction. anna: talk to me about where we might see good news. given that this is an economy where the government has for

many years wanted to orientate it more away from manufacturing and toward services. >> that is the good news. it is the number that stands out this year. nonmanufacturing pmi services was up. it was the one bright spot. that is a real bright spot because, obviously, the economy is moving more toward services and certainly the government is trying to move toward services. on the side that is toward services, the has gone up slightly. that is good news for that economy. further stimulus will help that, but that is the bright spot. anna: talk a little bit more about the politics of late. we see hong kong equity markets trading higher. we have seen positive commentary from president trump in tweets. as often we have done about the state of talks with china. he is talking about big progress

being made. this is still the big issue hanging over the chinese economy. >> it certainly is. we see president xi wanting to move forward. the call this weekend shows that china really needs to get this trade risk and these trade worries out of the picture for the economy really to move forward in 2019. the government there knows that. that is why they are pushing forward in these talks. it is really important in these 90 days where they are having not the threat of imminent more tariffs from the u.s.. they have said they will not impose tariffs on another $200 billion of goods while these talks are going on before march 1. after that, of course, if trade talks to not succeed, there could be more tariffs. that is a real threat.

there is pressure on chinese negotiators to come to some sort of deal with the u.s.. as we saw over the weekend, trump is telling us progress is being made. anna: we will look to those meetings in january to see if we can nail down any details. thank you very much. we are minutes away from the start of the equity trading day in europe. markets, we will be keeping a close eye on what they have to tell us about. it has been a painful year for european stocks. we will take a look at the key risks for the stoxx 600 in 2019. ♪

anna: this is "bloomberg markets: european open." it has been a rough year for european stocks. the stoxx 600 falling. let's bring in from our equities team, sam instead. good morning to you. it has not been a vintage year for european stocks. >> the worst in a decade, jurgen by risks all over the place. the appetite has been very poor. most analysts seem to be retreating. the money is falling out of european stocks. it has been a four-year. anna: what will set 20 apart from 2019? do we go into the new year more

optimistic? >> not really. the biggest problem really is that most of the risks that have hit european stocks are trade tensions, political risks, economic slowdowns. almost everything this year is going to repeat next year. most of the risks are the same. italian politics may well still rear its head. trade tensions are still there. basically, all the risks that were there this year -- anna: everyone worried about italy, now it is solved. >> that is one way to look at it. way to look at it is valuations are so low right now they cannot get much worse. it is possible you will see some kind of bounce because it has been so poor. anna: there is a positive note to close out the year. thank you. i think we are scraping the barrel with that silver lining. you can get all the latest stocks stories from our equities team by going to first go on

your bloomberg and the envelope the mobile-- and via app. futures are pointing higher. not all the european markets will be open. we will bring you the market open. ♪

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anna: good morning, everybody. less than a minute ago to the last cash equities trading for the year. let's have a look at the market with low volumes anticipated as many markets will be closed. some of them are open. the euro is flat against the dollar. oil is higher by 2.1%, 54.35 on brent. the general task overnight has been trade optimism. generally, we've seen the biggest drop since 2014. that's a negative story. hong kong is open. japan is closed, china is closed, but hong kong is open

and expressing optimism based on the trump tweet and xi's comment on it. the pound a stronger. futures suggest we will be stronger, but the dax is closed. many other markets also closed. modestexpected to make gains to reflect the optimism around the trade story. although i should point out, as we said, there was a negative from china. we discussed it with jodi schneider. that's the pmi data. the may factoring data looking -- manufacturing data looking weak. that trade story not entirely positive. it seems it's enough to go higher on the last trading day of the year in europe. some of the markets open, euronext markets open, the ftse open in london, as well. the ftse 100 up .01%. they ibex and the aex both out of the gate quite quickly and to

the upside this morning. let's look at the sector picture than. it's not a day where we talk individual stock names. this is where we got to be i-5 hundred broken down in the imap function, showing where he are. most things are red, apart from financials jumping into negative territory. we talk about the year that was in financials in great length with our guest. let's have a look at where we are on the individual stocks. it's another day we are focused on the individual movers, perhaps, because news flow is a little like on the corporate level. we do have some of the companies you might expect to be moving. oil price doing just that. we also see john would and other moving higher. g4s is the biggest gainer on the stoxx 600. the biggest loser, aib group.

if we look at that from a points percent of -- perspective, we have weakness in financials. barclays moving lower in this morning's session. that's a look at how we've opened up. equities markets not in full force. some are open, showing a slight modest move to the upside. that follows positive session in asia after president donald trump reporting big progress in trade talks with his chinese counterpart. cio.ng us, allen higgins, good morning to you. allen: good morning. a lot going on. let's talk about the trade story. we have president trump tweeting about this. the market ads optimism to the last trading day of the year. how optimistic are you we can make big progress on trade? allen: big progress on the trade

deal. i think we're working -- worrying about the china 2005 initiative. that's hard to break. you've got two big bears needing to hug each other. trump desperately cares about the stock market. he shouldn't be. he takes a very personally. he certainly has greater emphasis on this now and therefore anything that potentially weakens the stock market he's interested in avoiding you sought data overnight from china -- in avoiding. you saw data overnight from china and that's what they are dealing with. ina: manufacturing pmi territory. output, the weakness continues even with a trade truce in the short-term. it is contracted for the first time since 2016. they want to reorient the economy away from it. but still, this hurts.

alan: it does matter. it's a measure of sentiment. if we go back to the u.k. post a long time ago in 2016, it plunged after the eu referendum and recovered. it's not surprising industrial companies are nervous in china about potential of large sanctions and tariffs to come through. it's not that surprising but we've been here before around 50 with the china pmi. anna: we have been here before, with her memory. let's ask where we go from here. as you look to 2019, are you very concerned about global growth? you've made a point about how you need to prove the united states does not show recessionary indicators. pmi, itook at global doesn't stand out to the upside still. alan: the u.s. is looking

strong. the market will look for proof. are there signs of a u.s. recession, yes or no? this yield curve getting close to a version to make people very edgy indeed. it's been a very tough year looking back. reasons to be more positive going forward because we discount bad news, discounted for a high probability on the way to recession. we think it's a low probability event in the u.s., but the markets may wait for proof of that and over several months for markets regain animal spirits. anna: you talked about the progress we could make in trade. drawing a distinction between trade and other issues the united states and china might fallout about. we started focused on trade specifically. as we get toward the end of the year, there's an expectation of a truce on trade. we might make progress, but the issues around the rivalry between the largest and

second-largest economy, this is not going to go away in a hurry, and it might not go away after a trump presidency. it feels this has got longer legs. alan: definitely. it seems like there will be a trade deal. you're exactly right. we'll be talking next year about china planning for 2025. we'll see some words from china taking away that emphasis. they are deemphasizing it a little bit. there is a plan to be strong in tech and pharmaceuticals. that is where the u.s. is very strong. it's not just trump. it's the whole united states government. even the democrats see that as a threat. anna: where does the china threat go? you talked about the resilience of the china currency. my colleague was pulling up the estimates next year. there is a wide range, 6.25 on the strength side to 7.4 on the

weak side. where do you see it moving or not? alan: they do manage on a trade weighted basis. it's been remarkably stable considering the risk off environment. you might expect china at the center of it. a look at that graph, very stable. it costs you to speculate against it as far as paying forward points. on the slight positive side, 6.25 is remarkably bullish. that would probably indicate euro strength on a trade weighted basis. not quite in that space, but certainly wouldn't bet against the chinese one. it costs you to bet against it. two, there's a deal to be done. china doesn't want weakness in currency. anna: we talk more about the united states in a moment.

is it a year for weakness in the dollar? alan: could be. we've already seen, in december, three-month money, 70 basis points. you can use the bloomberg to work out how much fed tightening priced in. fed tightening seems to have moved away. governore new york, williams, who said we are going to look closely now at 2019. they are meant to be data dependent. also market dependent. why market dependent/ that affects financial conditions. we see it in credit spreads. we see it in the dollar. a lot didn't like it. holiday in december, we saw those in the comments. they are reflecting on that. anna: we talk more about the fed, inditex owes the markets. alan, thank you very much.

alan higgins stays with us. a number of exchanges are still open today. the london stock exchange is taking a half-day. it closes at 12:30 london time. we should also point out trading on spain's ibex will end 1:00 p.m. london time. most european bond markets and futures are closed for the holiday, as is germany. equity markets in germany, nordics, and switzerland all closed. white house officials are trying to set up meetings between trump and powell. but who would dispense it? we talk about the fed and the markets as we head toward the end of the year. this is bloomberg. ♪

anna: welcome back. this is the european market open on this final trading day of the year. you can see the markets open making moves to the upside. stoxx 600 of .2%. let's dive into top stories. dani burger is pouring over them. dani: good morning. we don't have much volumes, so any trades can be around these stocks a lot. easy that happen with hsbc. it opened nearly 1% declined. it's climbed up, off .25% after news of the ceo of the turkey

branch is under investigation for making negative comments about the president. 2013 retweet a a might the protests at that time. -- amid protests at that time. rio tonto is up after building a supply panic -- supply plant. a key deal because they wanted to bring the power supply into the country near their plant. billiond cost them $1 to $1.5 billion. also seeing commodities rally. ubisoft entertainment, the french videogame maker, rallying nearly .5% after news china is starting to approve videogames again. they have approved 80 titles. we did see tencent in china rally off this news. some of the game makers in europe are rising in sympathy. anna: mohamed elbaradei and the

chief economic advisor echoed president trump's opinion the fed would benefit from a better feel of the markets. he spoke to foxnews sunday. >> even the fed is understanding that it needs to communicate better. it needs to do two things in particular. one, show that it is more sensitive to markets and what is happening outside. the risk of spill backs, what the president has called, get a better feel of what is going on. second, the fed has to realize it cannot keep a really important policy tool on automatic pilot. that it needs to be more sensitive to what is happening. i think the fed can regain control, and we can stop these self-inflicted wounds. anna: meanwhile, white house officials are trying to arrange a meeting between the president and the fed jay powell. littlehed on this a before the break.

your latest stop on the fed. they need a better feel for the markets. the fed is very aware, one assumes, market matters, if it comes back to underlying sentiment in the economy and starts to hurt investor, or rather company's willingness to invest. there is a circle. there is a feedback loop. alan: there is. there's two elements and i agreed with mohammed. there's the nightmare scenario where they over tighten and over the curve. we've had the atlanta fed say they should avoid of earning the curve. by aversion, i mean three months 10 years. not geeky bond guys like to talk about. they need to avoid that. definitively, george soros called it reflexivity, the idea markets and the economy have a

reflexive link, if you'd like. that's right. there's been a tightening of financial conditions because of the spillover. there's been loan deals not been done, bond ingles -- bonded deals not been done. definitely. you have to say, trump does have a point, and the communication was a bit bloody, and williams -- blotty, and williams came out in late december, a week ago, trying to say, we understand this and we will take it in january. anna: the other thing bothering investors was around the hike itself, but also the alan's sheet. -- of the balance sheet. that seems to be an issue investors are still active -- grappling with. on widethe fed cruise the balance sheet? alan: i'm less bothered about

that because we've had no qe in the u.s. for five years now, four years. it's been such a long time since we've had qe, and its treasuries, namely, and high-quality mortgage backed securities. it's different from ecb qe, where there's a telling government bonds and corporate bonds. we're seeing treasuries well supported at the longer and. the idea of the fed selling treasuries to the market less bothers me, even in an environment of budget deficits. i'm more concerned if there's a lesson of this year, it's the short rate. short rates got too high and the markets can't come to terms with the short rates at these levels. anna: give us your thoughts when you look at the end of the year, where we're positioned on stocks. what echoes of the past does this have? 95,e been talking about 94, when we saw fed tightening their. i saw a chart that shows that.

fed funds went up. they increased. stocks didn't go up in tandem, but eventually did. do you see echoes of this? alan: i do. i think history is a good guide. there are two elements. crashes, slight echoes of 1987. but in 1994, we saw 300 basis point tightening. it went from three to six. imagine 6% rates in the u.s. basically, the market struggled, but eventually came to terms with the fact there is no recession. it's a tightening to strong growth. anna: are we seeing a tightening of strong growth still? alan: we are, but with risks. and markets need to see risks have been mitigated. the nightmares valerio, the -- nightmare scenario, they over tightened. feedback link on

financial conditions. that's what the market will be looking for. just like m line before 95, there was a strong bull market, the fed tightened but there was no recession. the fed could do well because they deregulated this year. anna: alan hagans stays with us. coming up, we talk about the banking sector. banks were one of the worst-performing sectors. how will they fare in the coming year? more on that next. let's look at how the markets are positioned as we look towards the end of the trading near. this is a snapshot of the grr function. this is a sector breakdown. we are bouncing higher on basic news sources. in positiveections territory in today's session. we talk more about big picture. this is bloomberg. ♪

anna: welcome back to the european open. we are 22 minutes into the trading day and the markets open are in positive territory, the stoxx 600 up .2%. european banks are one of the worst-performing sectors on the stoxx 600 this year. deutsche bank and danske bank among the biggest losers as they grapple with political troubles and changing management.

after a year that saw crashing valuations and dose of realism, they are in for a better 2019. our senior bank analyst for bloomberg intelligence is here. allen higgins is still with us, as well. i want to take us through some of the winners and losers. i've been looking at the function that tells us that. i was amazed to see banks doing well down scale. there are banks that have done worse than that. jonathan: exactly. deutsche bank, danske bank, metrolink, clydesdale. we're not going to love and or 12 times. we went into 2018 with significantly higher ratings. taplin estimates were unrealistic, frankly -- topline estimates were unrealistic, frankly. global investment bank, that's a

big miss. we're getting more of what is appropriate for revenue expectations. that said, we're not without headwinds. anna: also in the banking sector, alan, revenue expectations may have come down. they might be cheap, but they have the appetite for the banking sector. but: they are very cheap, also really cheap in the notice dates. --gship jpmorgan, 3% euro yield, 2% buy back yield in that. you don't need to come to your find it -- europe to find cheap banks. in terms of equity by us or the u.s., no need to play. where we do think you're overcompensated still is financial credit, the idea that -- youational banks can overcome satan in terms of

europe -- you overcompensate in terms of yield. get paid a heavy coupon along the way, rather than risky equity dividends in europe. anna: one of the big headaches for the banking sector is around italy. jonathan, talk us through how successful the italian banks have been producing -- reducing, fixing their debt problems, bringing down nonperforming loans. jonathan: there's a target for ratios across europe. with, greece, still a bank 30%-40%. the bank of bpm, along with the poster child of all that went wrong there. that's a deal in december. we'll see positive news there. that said, this is a saturated market. you've got islands finishing itself up. you got italy. you've got the greeks with two

concurrent bad bank plans. it's not a given, but if you want to buy a warrant on the sector -- anna: on the relationship between rome and brussels, what about the european central bank? who is most at risk from the maturing tell chose, the cheap loans? jonathan: funding isn't an issue yet. we do have 400 billion or so that will roll off. they have to start planning 12 months in advance. everyone says the europeans. but there are big continental european banks. the french, for example, borrow a lot of liquidity. we don't think it will be an issue, but it's another incremental drag. cost of funding goes up. anna: we've got that graphic that shows that. we've got this exposure to the tilt rose. thank you for the insight.

great to have you with us. jonathan tice joining us from the bloomberg's intelligence team. 8:26 in london. european equity markets up .25% as we head --

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anna: 30 minutes into the trading day. here are your headlines. deal, butth hour could the coalition be on course for a breakup? a good end to the terrible year. european stocks follow is a higher after trump reports progress in trade talks. china's slowdown deepens, manufacturing deal -- pmi jobs to the weakest since 2015 since measures of new orders slip. welcome to bloomberg markets, the european open. i'm anna edwards in london. 30 minutes into the trading day, let's look at how we are shaping up. we've broken it down by the biggest movers, some of it by points.

you are seeing the biggest weightings on points. they contribution by lvmh, seems appropriate on new year's eve. total and roil, a little more luxury. we have seen a bounce in the oil price. we are seeing moves higher. the global growth story among progress in trade. that is helping risk assets and oil prices. oil and luxury moving higher this new year's eve. as's look at the downside, we see which sectors and stocks are not joining in with the festive spirit. lower,ting bp moving down .3%. perhaps a little reorientation within the oil space. we also see some banking names under pressure. let's get the bloomberg's us -- bloomberg first word news update, i should say. desley humphrey has it from dubai.

china's slowdown deepens with activity at the nation's factory slowing in december. the official manufacturing pmi came in at 49.4, compared with the average economist estimate of exactly 50. it was the first contraction since july, 2016. however, the nonmanufacturing pmi beat expectations at 53.8. meanwhile, u.s. equity futures rallied after president trump reported a big progress in trade talks with president xi after a phone call on saturday. trump tweeted the deal is moving along very well and will be very comprehensive if made. italy's parliament approved its 2019 budget law. this follows the weeklong standoff with the european commission. the populace coalition partners agreed to lower their 2019 deficit target to 2.04%. the initial 2.4% target was

rejected by brussels as breaching eu rules. the chances of the u.k. leaving the eu are 50-50 if parliament rejects theresa may's deal, that's according to u.k.'s international trade secretary liam fox speaking to the sunday times. he called on his fellow lawmakers to back the deal, saying he would rather have an agreement that falls short of expectations than risk no brexit at all. russia and turkey have a crucial role to play in syria. that's according to a new year's message from vladimir putin to his turkish counterpart. this comes a day after they met in moscow and agreed to coordinate military steps to fill the void left by donald trump's decision to order a military pullout. bangladesh's ruling party has won by a landslide in an election marked by violence. according to the nation's election commission, the allies won almost 90% of seats up for election, but the opposition called the vote farcical.

as many as 18 people were l-related violence. this election gives the prime minister, sheikh hasina, an unprecedented fourth term in office, longest-serving premier since the nation became independent in 1971. south korea says kim jong-un wants more summits. president moon jae-in says the north korean leader sent a personal letter of well wishes over the weekend. kim says he's willing to meet more often in 2019 to advance peace talks and achieve a nuclear free korean peninsula. he's set to deliver his new year's speech on tuesday. japanese prosecutors extend carlos ghosn's stay in jail. this is another setback for the executive, who is setting to mount his defense. global news, 24 hours a day on air and at tictoc on twitter, powered by more than 2,700 journalists and analysts in more

than 120 countries. i'm desley humphrey. this is bloomberg. ♪ the euro is 20 years old tomorrow. the five presidents are using the currency's birthday to warned the job isn't yet complete. mario draghi called to supervise banks among other calls to action. alan figgins is still with us. the italy story, the big picture, what's been achieved, what still remains to be done. one adjusting comment from mario draghi made me cause. after 20 years, there is a generation who knows that no other domestic currency. that is quite significant, the fact it has lasted, it has survived with all of the challenges. whatever it takes. the fact it survived is no small achievement. alan: exactly.

and inflation has been well-behaved. hasto be fair, inflation been well-behaved outside the euro area. for me, i was a bond manager in the 1990's pre-the euro. and it may surprise to say that, but one of it was lower relative bond yields. we see lower volatility in meet italy -- in italy, but i can remember the french german thread at 100 basis points. there's more volatility in the 1990's compared to now. anna: many peripheral europeans eurozone economies benefiting from cheaper borrowing costs. that has been a major advantage, i suppose. alan: it has. it means right now at the front end, you've got negative yields virtually everywhere. you wouldn't have seen that in the 1990's. i'm quite sure that the likes of france, italy circa .5, would

have been much higher in the 1990's. it's made cheaper financing. i have to say, despite that, the likes of italy had disappointing economic growth over that period. inflationa big tick, rates low five. anna: on that story, mario draghi pointing out there was a generation that only knows the euro. he said during that time, the ecb delivered on its task of maintaining price stability. let's look back at that over 20 years. the few thousand -- the 2000s, very much so. then volatility at the 2008-2009 financial crisis. generally, it's been kept in a range that would seem well controlled, well anchored, versus previous experiences of inflation. alan: fair enough.

if we put the u.s. inflation rate over that and to the u.k., you'll have a similar richer. -- similar picture. because of technology, globalization, despite qe, negative rates. there's other factors going on. fair enough. but the growth area is a concern. i would say looking forward. we need to see the growth in the likes of italy, in particular, the country where the euro is the least popular. anna: italy has been a good trade for you, given the progress made, and the relationship between brussels -- alan: tiit's been a tough year, generally, but we do buy into the front end. ae reason is, to remember, yield in the eurozone is very valuable, much more viable than a yield in the u.s. you can take the yield in euros and has back into the dollar and

get an enhanced yield. when you get to 2% on the front end of eurozone, take that into dollars, that becomes 5%. a lot of that is washed out and the fear is overdone. the basic thinking, still true, banks own far too much a telling debt. default is out of the question. past dependency becomes less important. volatility becomes less important at the front end of the curve. the idea that italy's going to leave the eurozone is not ideal for the u.k.. that's a 10 year project. anna: the u.k. is not being -- a good european crisis can be good. alan: yeah. generally, if you're willing to buy into the headlines, come onto tv and see negative headlines about deficit out of control, than think a lot of it is priced in, it can work out. if you like our day-to-day job, we have to take into account the

value. this is the narrative. we talk about the narrative, and it is important. on the other side, where is the value? it's the front end of a telling government bonds is too much. anna: kept in check by brussels. alan: the narrative improved. anna: does that hold in 2019? they'velk about yes, put a sticking plaster over the differences this time around. they managed to agree lower budget deficit. can that be sustained in 2019? does that change from what you've been saying? alan: the market would like to see more from salvini definitely. he seems to be doing well. that could work out well. i'm sure there will be a shakeout in terms of italy. i'm sure they will want to spend more money and there will be clashes along the way. the basic premise is, the front end of the curve is pretty well anchored.

10 years you could trade in terms of government bond. but the front end, earning that yield and hedging it into the dollar or sterling is an attractive trade. anna: thank you very much. thanks for spending time with us . happy new year. thank you very much. alan higgins. alan is going to be joining the bloomberg radio team to carry on his conversation. let's take a look at your make cap movers. dani burger has found them for you. dani: today is the day you might want to do window dressing, by some stocks that are maybe going to outperform in the new year. we're seeing some of that with as for capital. they released a report saying trading is in line for the year, comparable revenues up 51% in the fourth quarter, as well as growth of 44%. -- up 44%. up, ad a positive right

columnist saying there was a bit of the baby being thrown out with the bathwater, sold off during the brexit concerns. g4s is breaking out cash businesses, baron saying that will give a value to shareholders. shareholders jumping onto that report, shares up nearly 3%. one of the big gainers here, the biggest gain on record, trading at a 2010 high. this comes after the company said it has an exclusive for rbc fund, the majority holder. they are going to sell majority stake to cbc capital, another pe fund. this is stoking those rumors of a takeover that's helping a bid come into the market for this potential end of the year m&a deal. anna: dani burger with some movers in the make cap space to give an eye on. yearxt, 2018 was a tough to stomach for packaged good

companies. we take a look at the year for the food and drink sector. that's next. this is bloomberg. ♪

anna: welcome back to the european open. a positive trading date for the markets that are open. we are not all here. london is here, some of the euronext markets are open, up

.6% in paris. let's talk food and drink. seems appropriate. 2018 was a good year for european consumer staples, which outperformed the stock 600 by 4%. things were tougher for packaged foods. they underperformed by 9%. what is the outlook for 2019? fox, fromed by duncan bloomberg intelligence. thank you for speaking to us. what are the challenges for the sector as you look at 2019? how do things look to you? duncan: it's going to be a very challenging year. the same things that hit 2018 is going to come again. however you get rising and no volume or most problem -- most companies are not getting priced in at all. the broader index that you should with the packaged food index the smaller companies have struggled to get rising.

when they disappointed, shares have been hammered. that's the risk. anna: this is the chart you're referring to. packaged food companies in the purple underperforming others in the food and drink space. what has been a headache, changing consumer taste, lack of pricing power? what is the story? duncan: a bit of both. the logic companies are not quick enough to change to the consumer taste. emerging markets, in particular, you got urbanization, that's allowed dissipation from retailers and that took away a massive benefit. they could distribute around all of emerging markets. now it's easier for smaller, local companies to chip away at market share. it makes pricing more difficult and combined, that makes organic growth story much more difficult. exciting from a new entrants consumer perspective?

duncan: very much so. anyone who knows what's going on can distribute in one city and do very nicely and make good returns. that chips away at the market share of the big boys. anna: almost a threat to the business model of big food. duncan: absolutely. they have to win a lot more quickly. performance of the x ceo stating they used to have six to nine months to bring a new product to market. now it's six days. that's a different business model to the past. anna: difficult in size and scale. the index trading at significant premiums. we talk about the challenges. let's talk about the pricing of stocks. if they are trading at a big premium, what is that mean for the big companies? a lot of expectation in their. -- in there. duncan: they're defensive stocks.

they generally delivered. what they have done is made acquisitions. you had m&a slicing in there, as well. m&a is extremely expensive at the moment. you only have to look at the intangible. it's ballooned in the last year or two. cash hasn't improved. the big issue for 2019, they have to deliver on organic growth. more important on the cash flow, because you're buying huge cash generation. anna: interesting, structurally. you're seeing a challenge to the business model because there are small entrance. at the same time, companies are trying to scale up to become bigger, even as those challenges exist. m&a is still a feature in 2019? duncan: absolutely. balance sheets are strong. there will probably more add-on m&a rather than structural changes. wouldn't be surprised if you see

themselves a underperforming assets and we distribute the cash to where they could win. they've got to be a lot more cute on how they run their business. anna: what about brexit? i don't think we've mentioned it all show. is up to you to fill us in. duncan: thank you. anna: in this particular sector. announcer: -- duncan: it's very big for the sector. continental,opean global companies, 3%-6% of sales. it is an issue for all of them, 18% of europe. we import half the food that comes into our country. from the distribution or supplier base and supply system, it's going to be a challenge. that could raise costs. we talked about inflation a little bit. pushing cost to consumer will be difficult to do if the economy is wobbly. anna: i remember talking about how that would be an issue. what about disruption to

distribution and supply chains, the need to stockpile? we are hearing from ceo's in this sector about a need to stockpile. duncan: we have seen a few companies put that into place. about 80 basee points for the margin to make sure they've got the right distribution supply chains in place. i know nestle has been doing the same, storing upkey rom -- storing up key raw materials that matter. yeah, most companies should have our he thought about that and put the key raw materials down already. obviously on the rest, it's a case of having enough stock to make sure you get through. anna: thank you very much. duncan fox, company analyst at bloomberg, joining us with the latest on the food injury -- a food and drink sector. bloomberg terminal users can interact with all the charts we

use on bloomberg tv. we used a few in that conversation. all the others will appear on the gtv function on the bloomberg. you can browse the charts and use them in your research. feel free to borrow them at will. next up, battle of the charts. this is bloomberg. ♪

anna: welcome back to the european open.

equities getting a boost from the hong kong market that went higher on positive trade talk from president trump. time for battle of the charts. dani burger is going head-to-head with matt miller. he is year. he didn't just sleep in. he was supposed the up later. he's anchoring the next program. dani, let's come to you first. dani: i'm starting off with one of the big charts for 2018, the year of the haven. havens are outperforming global stocks for the first time since 2015. a haven basket in the white has gold, has the dollar, develop market government bonds. a lot in here. it's set to gain more than 4%. the msci index set to lose more than 11% this year. this is global growth concerns, corporate learning concerns, as well as this basket has emerging markets, which were shaky at the beginning of the year. but this recent dip is off

market. this trend my continue if global concerns continue. anna: matt, good morning. matt: good morning and happy new year to both of you. i have a chart that takes a long back look. i stole it from gina martin adams on bloomberg intelligence. you can see the red and the green arrows here, these are all the years the stock market has either risen or fallen since 1940. and then the shaded areas here at the bottom, and i can make this bigger, shows the big bull markets. 1969, anduntil about about 1982 until about 2000 and now. you can see, some people would divide these, but basically they are big long bull markets. her point is, during these bull markets, you can still get points where markets fall in certain years. that doesn't mean it's all over

yet. anna: matt, very nice. i like them both. i'm going to go with dani, a reminder of the havens available. surveillance with matt miller is up next. this is bloomberg. ♪

♪ matt: big progress. equities/futures rise after president trump expresses optimism over trade talks, but will the hope for a deal last? the fed in focus. becoming the latest the central bank will benefit from a better feel for markets amid reports the white house is trying to organize a trump/powell meeting. plus, italy's government passes the budget at the 11th hour, but good 2019 see the an easy populous fall apart? welcome