LONDON (Reuters) - Probably the main takeaway from Thursday's UK local elections at this stage of the count is simply that PM Theresa May has avoided the type of mid-term disaster that could have triggered wider ructions.
Remember that, only a few months ago, some opposition politicians were predicting a rout that would both topple her and be a game-changer for Brexit. That has not happened and, while it is too early for full analyses, it might say just as much about the electability of Jeremy Corbyn’s Labour Party as it does about May’s still vulnerable leadership.
There will be even more than usual interest in Bundesbank chief Jens Weidmann’s speech at an event in Frankfurt this afternoon after yesterday’s soft eurozone inflation number.
Weidmann insisted only on Wednesday that it was still realistic for markets to expect a first rate hike from the ECB in the middle of next year, despite growing signs of weakness in the region's economy; since then, the debate around a possible delay to tightening has grown louder.
The Swedish Academy, the outfit that picks the winners of the Nobel Literature prize, has decided not to award the prize this year. The Academy has become embroiled in allegations of sexual misconduct by the husband of one of its members and is reeling over the admission that the names of some prize-winners were leaked in advance.
It looks as though folks have retreated a bit to the sidelines after the gyrations of the past week – world shares are flat after hitting one-month lows on Thursday and set for the biggest weekly loss since mid-March. The dollar too, after hitting 2018 highs this week, is flat, more or less.
A weaker session on Wall Street overnight has set the tone, following lacklustre earnings from the likes of AIG and Spotify as well as another large drop in Tesla. That helped sent U.S. 10-year yields to a three-week low, especially as economic data showed tentative signs of moderating growth stateside.
But that’s nothing compared to the increasing growth gloom on this side of the pond, with yesterday’s UK services PMI virtually wiping out the chances of a BoE rate rise next week, and weaker-than expected euro zone inflation numbers (0.7 percent core inflation versus 0.9 percent expected) are casting some doubt on the ECB’s timetable to roll back stimulus from September. That’s pushed out the gap between German and U.S. 2-year yields further towards new 29-year highs.
In Asia, U.S. Treasury Secretary Mnuchin is talking trade with Chinese President Xi and positive vibes from that could possibly be the catalyst to send stocks higher again? For now though the talks have put the yuan on course for a third week of losses, its longest losing streak since Sept. 2016.
But what investors are really waiting for is the 1300 GMT US jobs data – a Reuters poll indicates an increase of 192,000 jobs last month, after a rise of only 103,000 in March. But it will be the hourly wages figure that will be closely watched to determine future Fed hikes – the poll reckons hourly wages will have risen by 0.2 percent (0.3 percent in March)
The dollar index has risen about 1 percent so far this week and is on track for a third straight weekly gain. The euro is holding near its four-month low, as is sterling, which has lost 1.6 percent this week and has virtually erased all its year-to-date gains on back of receding rate expectations.
There is also trouble in emerging markets – Argentina raised rates by 300 basis points to 33.25 percent on Thursday, but the second steep rate increase in less than a week failed to stop the peso currency from plunging to a new record low. The Turkish lira is also inching to a new record low, and Indonesia’s rupiah is near its lowest since December 2015. It is a reminder that it is five years this month since the infamous taper tantrum.
European shares have opened higher following losses in the previous session as earnings continue to roll in, while the recent strength in the dollar has put the euro zone STOXX index on track for its sixth straight week of gains - its longest winning streak since September 2017. Main country indexes are up 0.3-0.6 percent but the banking index is down 0.9 percent, hit by poor earnings.
Results continue to roll in. It's a heavy day of results for financials, with HSBC reporting an unexpected 4 percent drop in first-quarter pre-tax profit due to a surge in investments, sending the stock down almost 2 percent, although the pill may be sweetened by a new share buyback plan of up to $2 billion.
French bank BNP Paribas is down almost 3 percent after posting a 17 percent fall in quarterly net profit on revenues falling short of expectations, weighed down by a weaker dollar and sluggish fixed income trading.
Shares in Societe Generale have plunged 5.5 percent as its quarterly profit, too, is below consensus. Numbers from insurance heavyweights Swiss Re and Generali are better than expected, however, boosting shares 0.6-1.0 percent. A stronger euro impacted the value of sales at France's biggest insurer AXA.
Elsewhere, forex headwinds were also blamed by German luxury carmaker BMW (down 1.3 percent) for its 3 percent drop in quarterly operating profit. In European shares overall, Q1 profits are seen up 2.5 percent in euro terms or 14.6 percent in dollar terms, according to Thomson Reuters data.
Eyes also on Telecom Italia on the day when its top two investors - Vivendi and activist fund Elliott - will face off for the first time as they put their battle over board seats at the Italian phone group to a shareholder vote. News that Bayer sold a further Covestro stake for 2.2 bln euros may also be welcome as it could reduce the cash call the company will need to fund its takeover of Monsanto. Bayer is up 1.3 percent.
In emerging markets, shares grind lower, with a loss of almost 2 percent so far this week. The latest sell-off appeared to lose some steam, however, as markets took heart from positive noises from trade talks with China.
With the dollar poised for a third week of gains, currencies had another torrid week, with Turkey’s lira and Argentina’s peso once again taking the limelight. The lira – hitting another low - is on track for a 4.7 percent fall since Monday, its worst week in a decade.
The peso chalked up a near 8 percent tumble in its worst week since Mauricio Macri devalued the currency after taking office in December 2015. South Africa’s rand is on track for a 2.5 percent decline in its sixth straight week in the red, and has now given up more than two-thirds of the gains it had made since Cyril Ramaphosa took the helm of the ANC in December.
Armenian Eurobonds perk up a touch after four days of losses following signs of a political deal emerging on Thursday.
— A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own. —