June 21, 2019 / 7:58 AM / a month ago

Daily Briefing: Heavy going on jobs, climate at EU summit

LONDON (Reuters) - It’s been a fairly inconclusive summit in Brussels so far.

European Union flags fly outside the European Commission headquarters in Brussels, Belgium, April 10, 2019. REUTERS/Yves Herman

Leaders failed to agree on who they want to take over the running of the big institutions, with the one clear outcome being that the next head of the European Commission will not be German conservative Manfred Weber.

There was agreement to have another go at breaking the deadlock on June 30.

Perhaps more significant, the bloc also failed to take leadership on climate change as a number of largely eastern nations blocked a commitment for the zone to be carbon-neutral by 2050 - in the end, that aspiration was relegated to a mere footnote in the summit communique.

That hands a propaganda coup to departing EU member Britain, which has just committed itself to a similar target and is now bidding to host the 2020 UN climate talks.

Today the summit agenda turns to the equally knotty subject of deepening policy integration in the eurozone.

Italy’s Matteo Salvini came away from his recent visit to Donald Trump in the United States with the brain wave that he could sell hefty tax cuts as a bold supply-side reform rather than simple profligacy.

He has gone one step further in this morning's Corriere della Sera by vowing to quit the government unless he gets cuts of at least 10 billion euros.

Such a fiscal hit would clearly make it harder to find any compromise with Brussels in the stand-off over Italy’s debt mountain.

In the end, police in Georgia resorted to firing rubber bullets at protesters outside the country’s parliament building late on Thursday in a confrontation with crowds angry over the visit of a Russian lawmaker.

Russian influence in Georgia remains a politically sensitive subject over a decade after the U.S. ally fought and lost a short war against Moscow in 2008.

Thursday’s protests were sparked by a visit by Sergei Gavrilov, who was leading a Russian delegation taking part in a meeting to foster relationships between Christian Orthodox lawmakers.

Georgian Prime Minister Mamuka Bakhtadze said the situation outside the parliament had been “provoked by opposition forces.”

Late last night, Georgian President Salome Zourabichvili accused Russia of whipping up unrest in her country.

MARKETS AT 0655 GMT

Central banks have set the bulls running, but is U.S. President Donald Trump trying to curb them? He had apparently ordered missile strikes on Iran (according to the New York Times), then rescinded the order at the last minute.

But more likely this is just a breather after a rally that’s taken bond yields to record lows and some equity indexes to record highs.

So world stocks have pulled back today after three days of gains and after seeing the SP500 and Dow Jones reach record highs last night.

The MSCI all-country index is still on track for its third week of gains.

Europe is opening weaker and Wall Street is likely to do so, too, futures indicate. Oil prices and emerging markets have pulled back slightly.

It’s coming to the end of an eventful week.

First came the European Central Bank’s dramatic pivot.

Then the Federal Reserve more or less confirmed it would cut rates in July.

The Iran tensions mounted and the leadership race in the UK dragged on.

Flash PMIs are due today and may confirm what markets and policymakers seem to suspect – things are not good.

Japan has already posted data showing manufacturing contracted again in June and new orders fell to their lowest in three years as China’s slowdown and trade wars take a toll. Consumer inflation slowed to 0.8% in May, raising likelihood of a July policy easing.

Similarly, Korean exports, a bellwether for the state of the world economy, posted a 12% export contraction year-on-year in May, with semiconductor exports down 24%.

In Europe and the United States, it’s unlikely to be much brighter – a U.S. manufacturing index slipped last month to almost a decade low. German manufacturing may register a sixth month of decline.

So despite recent equity gains amid stimulus hopes, it’s really more of a market for bond bulls.

U.S. Treasury yields remain near 2%, after falling under that this week for the first time in two years.

German yields dropped to record lows below minus 0.3% and are set for a seventh straight week of decline.

Bonds aside, safe havens are very much in favour.

Gold prices are above $1,400 to a near six-year peak.

The Japanese yen is at its strongest since January against the dollar and up more than 1% this week, on track for its strongest week since March.

The dollar is set for a weekly loss against a basket of currencies,  and if the weakness is sustained, June could be its first month in the red after four in the black.

Sterling is at a two-week high versus the dollar, apparently paying little attention to news from the PM leadership battle, where Boris Johnson is widely considered a shoo-in.

European shares are opening off yesterday’s six-week highs. A breather was inevitable with investors locking in some profits before the weekend and risk appetite sapped by the tensions between Washington and Tehran.

But the STOXX 600 index is on track for a 5% rise this month, its best since January.

In corporate news, there’s more fallout from the U.S. ban on China’s Huawei.

After similar warnings from Broadcom and Siltronic, IQE, the U.K.-based maker of semiconductor wafers, has warned of lower-than-expected fiscal-year revenue because of order delays and slowing business from chipmakers. Dealers says the shares could fall as much 20%.

Focus will remain on Natixis after Morningstar's put one of its asset-management division's H2O fund under review amid concerns about its investments in illiquid bonds and conflicts of interest.

The stock had its worst day in three years yesterday and HSBC this morning downgraded its rating to “hold”, cautioning that forced sales of assets by the fund could be “painful” and raising doubts about H20’s “outsized” contribution to the French bank’s asset management division.

Care home operator Korian is likely to come under pressure after Canada’s Public Sector Pension Investment Board sold a portion of its stake in a share placement. 

Eyes will be on Trainline's IPO on the LSE, with shares priced at the top end of its targeted range, which values the rail-ticketing company at 1.68 billion pounds ($2.13 billion).

Emerging markets are among the big beneficiaries of central bank largesse, and have rallied accordingly. But fears of an escalation in Iran-U.S. tensions and renewed trade woes doused the multi-day rally across emerging-market stocks, which ended a three day winning streak, and currencies are weakening.

MSCI’s emerging-markets benchmark fell 0.1%, with Asia leading the losses.

South Korea’s KOSPI was down 0.3% after data showed a sharp decline in the country’s exports.

Nonetheless, emerging- market stocks are on track for a 3.7% gain over the week, their best weekly showing since the mid-January rally.

An emerging-market currency index was on track for its best week since the first quarter.

But currencies are under pressure as the dollar stabilizes.

South Africa’s rand fell by 0.3%, in line with currencies elsewhere, with markets seemingly unfazed by President Cyril Ramaphosa's pledging to speed up a $16 billion rescue plan for battered state-owned utility Eskom. Turkey’s lira slipped 0.5% with little sign that the standoff with Washington over the purchase of a Russian defence systems will be resolved anytime soon.

Russia’s rouble matched those declines. Still, three currencies were on track for a 2% to 3% gain over the week.

A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Sujata Rao. The views expressed are their own. 

Editing by Larry King

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