May 24, 2017 / 7:31 AM / 2 months ago

Daily Briefing: Army on UK streets; papal talks for Trump

6 Min Read

Police officers join people taking part in a vigil for the victims of an attack on concert goers at Manchester Arena, in central Manchester, Britain May 23, 2017.Peter Nicholls

LONDON (Reuters) - Prime Minister Theresa May is deploying soldiers to key sites around Britain in the wake of the Manchester suicide bombing amid concerns that further attacks could be imminent.

One nagging question for the police is whether Salman Abedi made his bomb alone or had help from others still at large. It is too early to speculate what impact the attack will have on a June 8 election where only days ago May's lead was being whittled away in a controversy over her plans for social care funding. The next poll comes at the weekend; but in the meantime, critical headlines about her "dementia tax" have all but vanished.

Donald Trump and Pope Francis have much to chew over in their meeting today after the two men exchanged sharp words during Trump's election campaign. Two possible bones of contention are Trump's much-vaunted Mexican wall (judged "not Christian" by Francis) and their differing views on climate change. Francis said last week he would be "sincere" with Trump but did not want to judge him before listening to him in person.

A perfect constellation of factors may be emerging for the re-election in September of Angela Merkel. On the political front, both the rival centre-left SPD and the upstart anti-immigrant AfD party are running out of momentum, judged by recent state elections and national polling data. On the other, the economy looks to be coming good at just the right moment: after yesterday’s Ifo data pointed to business confidence being better at any time since reunification of the two Germanys, now a GfK survey this morning shows German consumer morale at its best since Oct. 2001.

MARKETS AT 0655 GMT

Pope Francis meets U.S. President Donald Trump and his wife Melania during a private audience at the Vatican, May 24, 2017.Alessandra Tarantino/Pool

The decision by Moody’s credit rating firm to downgrade China’s sovereign debt for the first time since 1989 shines a light back on to one of the big background risks for the world economy and away from U.S. and European politics for a moment. Moody’s, which cited a gradually slowing economy and rising debts at state enterprises, had put China’s debt on review for downgrade more than a year ago.

S&P also has China’s debt on negative watch and has a rating one notch above Moody’s, so it may well follow with a similar move. Much like other negative surprises of late, however, the market reaction has been pretty muted across Asia. Shanghai stocks have lost less than half a percent, HK is flat and Tokyo and Seoul are both higher as Wall St stocks gained again overnight.

China’s yuan and the Australian dollar are a touch weaker and spreads between Chinese government bonds and that of state enterprises widen about 2-3 basis points. But no shock pricewise. And, more broadly, the almost peculiar low-volatility calm of two weeks ago seems to have returned, with the ViX implied volatility gauge back below 11 percent. Tuesday’s sweep of global business surveys for May seem to have underlined the broadly upbeat economic mood in the second quarter.

But curiously, the huge gap between economic surprise indices for Europe and the United States – which had started to narrow slightly late last week – has widened again on Tuesday. The U.S. negative surprises are outweighing positive ones now at a higher rate than at stage since February 2016. While the dollar has stabilised after recent losses and euro/dollar is back below $1.12, this Transatlantic divide in economic fortunes is still a big focus.

Supporting the dollar for now, however, is the rebound in Fed rate hike expectations – with futures markets now putting the chances of a June hike back as high as 80 percent from as low as 60 percent last week as Wall St wobbled on the mounting investigations into U.S. President Donald Trump’s links with Russia. FOMC meeting minutes later on Tuesday will be the next marker in this regard.

Trump’s international trip has him in Rome to meet the Pope and the Italian government on Wednesday before heading to Brussels for the NATO talks and meetings with European Union officials.  Brent oil is firm above $54 ahead of tomorrow’s OPEC meeting. European stocks are expected to open flat.

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