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Daily Briefing: Spain's austerity trade-off
March 31, 2017 / 7:32 AM / 8 months ago

Daily Briefing: Spain's austerity trade-off

LONDON (Reuters) - Spain's 2017 draft budget, due finally to be approved by government today, is interesting on a number of counts.

Spain's Prime Minister Mariano Rajoy addresses a joint news conference with Malta's Prime Minister Joseph Muscat after holding talks on Brexit in Valletta, Malta, March 29, 2017. REUTERS/Darrin Zammit Lupi

First, and against all odds, Prime Minister Mariano Rajoy has managed to secure enough backing to pass the law without relying on the Socialists - a sign he may be in a position to go for an entire four-year term when most analysts thought he would struggle to see it out.

Second, it will show how far Spain is moving away from a strict diet of austerity. In the last few days alone, it has promised 4 billion euros of infrastructure spending for Catalonia, a one percent increase in public sector wages, the conversion of 300,000 temporary public sector jobs into permanent contracts and thousands of new teacher jobs.

Such moves came about not only because it had to convince other parties to back the draft law but also because it is now betting on more growth rather than less spending to reach its deficit targets.

Arguing against an early tapering of its stimulus package, the European Central Bank has consistently said the current rise in euro zone inflation is mainly based on energy and commodities and will not last.

Data on Thursday suggested the caution was warranted. As this graphic - bit.ly/2olmYTG - shows, rising prices in Germany and Spain came down with a thump this month.

Today’s euro zone inflation data for March may show whether that is reflected in the region as a whole. Reuters polls suggest it will dip year-on-year to 1.8 percent from 2 percent.

Speaking in Malta, EU President Donald Tusk will tell Britain today how the EU aims to negotiate its "orderly withdrawal" from the bloc, limit uncertainties for businesses and pave the way for a close future partnership.

Once endorsed by leaders at a summit on April 29, the guidelines he will present are intended to pave the way for talks which the EU's chief negotiator Michel Barnier expects to start in about two months.

Diplomats say they will reflect the 27’s previous insistence on a “balance of rights and obligations” - notably that Britain will have less access to EU markets if it opts out of the bloc’s system of centralised rules and common budget contributions. No surprises there.

MARKETS AT 0755 GMT

Q1 is over. Report card: Emerging markets stocks take pole position (+12 percent in Q1) followed by euro zone stocks and gold. Oil, commodities and the dollar index are poised to end the first quarter of the year as the worst performing asset classes globally.

Some notable reversals in the latter half of the quarter as some of the optimistic projections and forecasts on Trump got tested. In particular, U.S. banking stocks are poised to finish the quarter up just 2 percent after a breathtaking rally since last summer.

Quarter/month-end flows likely to make things choppier with some reallocations and portfolio adjustments already under way. Next week, the ECB begins its planned reduction in monthly bond buying.

In South Africa, President Jacob Zuma fired Finance Minister Pravin Gordhan as part of a wider cabinet reshuffle sending the rand tumbling for the fifth straight session, down 1.3 percent on the day and nearly 8 percent this week – the worst weekly performance in 15 months. Local assets are under pressure with the yield on the benchmark 2026 bond rising above 9 percent, Eurobond yields rise across the curve. Gordhan, seen as a steady hand by markets, will be replaced by Malusi Gigaba – home affairs head and an unknown quantity without real finance experience, according to analysts.

Editing by Alison Williams

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