(Reuters) - Data out today showed that France met the European Union's budget deficit rules for the first time in a decade. Its net borrowing dropped below the EU ceiling of three percent of GDP, in part thanks to stronger-than-expected growth in the wider economy that has lifted tax revenues, reducing the need for sharp cuts to spending.
It was always President Emmanuel Macron’s goal to rebuild France’s fiscal credibility with Berlin and Brussels to win support for his plans to reform the euro zone’s institutions, but that effort has stalled for the past three months with the absence of a government in Germany. IMF Managing Director Christine Lagarde is due to talk about this very theme in Berlin at 0900 GMT.
The Catalan issue has reared its head again with the detention of separatist leader Carles Puigdemont in Germany. Spain, which wants to extradite him and put him on trial for treason, has also reactivated cases against 25 figures in the independence movement. Catalan protesters and police clashed in the streets of Barcelona last night, but the developments deal a serious blow to the drive for independence. European governments have generally supported the Spanish government, but there may be some unease at the use of such hard-line measures in a country where the legacy of dictatorship still lingers.
After a horrible Friday, global stock markets have rebounded somewhat on some optimism that U.S. trade protectionism may be more selective and tactical that first feared. U.S. stock futures jumped almost 1 percent overnight after a Wall Street Journal report that the United States had sent China a list of demands for greater market access for U.S. firms in areas such as autos, semiconductors and financial services and that Treasury Secretary Mnuchin was considering a visit to Beijing to begin negotiations.
The report follows the signing last Thursday of some $60 billion of U.S. tariffs on Chinese imports on top of the tariffs on U.S. imports of steel and aluminium announced earlier in the month – both of which hit world stock markets hard on worries about an all-out trade war. Signs of potential compromises this early, however, were also supported by news overnight that South Korea would be exempted from U.S. steel tariffs in a revision of the bilateral trade pact between the two countries.
South Korea’s Kospi index outperformed with gains of almost 1 percent. And, after early losses, other Asia bourses advanced too. Japan’s Nikkei225 was up about 0.75 percent and Hong Kong was also in the black. Shanghai bucked the trend with losses of 0.8 percent. The yen, which tends to benefit in times of global economic and political tensions, fell back against the dollar after touching a 16-month high.
The dollar was lower more broadly, with euro/dollar firmer at about $1.2360. U.S. Treasury yields, which retreated last week as stocks shivered on the global trade war fears, also pushed higher. European stock markets are expected to open slightly higher.
The risk-averse mood from last week was most evident in euro bond markets. Italian bond yields rose on Monday, underperforming euro zone peers on further signs that the anti-establishment 5-Star Movement and the anti-migrant League might explore an alliance to form a government. The head of the 5-Star Movement at the weekend praised the League's leader, Matteo Salvini, after the two parties agreed a deal to elect parliament's speakers.
There was also a slight underperformance in Spanish bonds despite Friday’s S&P ratings upgrade to A- from BBB+ as focus returned to tensions with wealthy Catalonia. Former Catalan leader Puigdemont was detained in Germany on Sunday, five months after entering self-imposed exile from Spain, and fresh protests broke out in the restive region.
— A look at the day ahead from Desk Editor Angus MacSwan and EMEA markets editor Mike Dolan. The views expressed are their own. —