March 1, 2019 / 8:32 AM / 8 months ago

Daily Briefing: Back to normal - ECB too late?

LONDON (Reuters) - A Reuters poll of ECB-watchers released this morning sets out the current tension in the bank's policy-making. Economists firmly expect the European Central Bank will delay hiking interest rates from record lows until next year and will soon re-launch its offer of long-term loans to banks.

FILE PHOTO: European Central Bank President Mario Draghi attends a ceremony to mark the 20th anniversary of the launch of the euro, at the European Parliament in Strasbourg, France, January 15, 2019

Yet over 60 percent of them also predict there will be no change at its March policy meeting to current guidance setting the scene for a hike in rates later this year - supposedly starting the long haul back to a more normal monetary policy after the post-crisis years.

With evidence of a global slowdown now underway and the US Fed now in wait-and-see mode, the question is whether ECB chief Mario Draghi has left it too late in this cycle to start the normalisation.

The United States overnight laid out its objectives for a post-Brexit trade deal with the United Kingdom: Any hope that it will give Britain an easy ride look pretty forlorn. Washington is seeking to entirely eliminate or reduce barriers for U.S. farm products and secure duty-free access for industrial goods.

This is all part of Donald Trump's mission to demand better terms of trade across the world, saying poor deals have cost the United States millions of jobs. Forget any talk of a special relationship - Britain will not be spared from that push.

Another weekend, another election in Europe where the main focus is on how many votes a far-right upstart will secure. This time it is Estonia in the Baltics and the party is the anti-immigrant EKRE movement of Mart Helme currently polling at around 18 percent.

If that translates into a similar number of seats in parliament it could force the mainstream parties into the same kind of loveless, messy coalitions that increasingly characterise Europe’s politics.

MARKETS AT 0755 GMT

Wow, there’s quite a bit of decent news out there! World shares are flatlining today, the first day of March, but shares in Europe and the United States look set for a stronger open and Asia has enjoyed some robust gains.

First off, Chinese mainland shares got a reason to cheer, rising more than 2 percent after MSCI said it would quadruple the weighting of mainland shares in its global benchmarks later this year. That could draw more than $80 billion of fresh foreign inflows.

But it is on the global growth front that hopes are stirring -- Chinese PMI manufacturing for February surprised to the upside, with the index rising 1.6 points from last month (though it did remain in contraction territory). But the new orders index component, the forward looking element, increased sharply.

That follows yesterday’s official Chinese PMI data which also showed new orders expanding. Similarly, U.S. GDP came in stronger than expected yesterday while the Chicago PMI also showed a rise in new orders.

Germany has kicked off the European session, saying retail sales jumped 3.3 percent in January for their strongest rise since Oct 2016. So hopes are growing that the euro area may have turned a corner while growth in Sweden also beat forecasts yesterday.

So the wait is on for today’s other data cuts – U.S. ISM manufacturing, British PMIs and in the euro zone, we get unemployment and bloc-wide preliminary inflation – will there be any sign of this rising towards the ECB’s 2 percent target? Headline inflation is expected to have risen thanks to energy but the likelihood is that the underlying core has eased further.

But before we get ahead of ourselves, emerging markets signals are mixed – factory growth has surged in India and Turkey to multi-month highs but South Korean exports – a sort of bellwether on world trade – have suffered their biggest slide in three years. And remember, the Chinese manufacturing PMI remains below the neutral 50-mark dividing expansion from contraction for a third month.

Focus is also on whether China and the United States can reach a trade deal – while President Trump warned he could walk away from the talks, his economic adviser Larry Kudlow said a deal is edging closer, with talk of a meeting in March between Trump and Xi.

On other stock markets, the Nikkei jumped 1 percent, taking its cue from the weak yen, U.S. stock futures are up almost half a percent following Thursday’s weak close. But there are some concerns on that front, with many increasingly seeing a disconnect between stocks 10 percent-plus gain and negative earnings expectations for Q1. Emerging stocks are up 0.3 percent.

On the currency front, the dollar continues to flex its muscles against the yen, rising to 10-week highs versus the Japanese currency after the U.S. GDP data. Its advance gained momentum after it sailed above the technical indicator of the 200-day moving average, which is used by many funds as a key buy/sell signal. The greenback is up also against a basket of currencies, rising off three-week low that was hit Thursday when the PMI data pushed the euro higher.

The euro has come off three-week highs versus the dollar but is set for its second week of gains, while sterling is set for its second week of 1.5 percent-plus gains. Inflation data today could be a driver for the euro. German 10-year yields have already touched a new three-week high this morning.

European bourses are set to open higher but there isn't much out there to help sustain a long-lasting upward trend after Wall Street closed in the red last night. Some important macro data from France and Germany on employment and manufacturing due later on this morning could help set the mood.

In corporate news -- in the UK the LSE announcing a jump in results with no Brexit hit on clearing, hedge fund Man AuM dipping, WPP predicting lower 2019 sales, Lloyds starting a share buyback programme.  

In M&A news, the U.S. Justice Department is asking Thales to divest its general purpose hardware security module (GP HSM) business if it wants to go ahead with its acquisition of Gemalto. In the luxury segment, Moncler promises more growth after 19 pct jump in 2018 sales.

Emerging market stocks swung to their first gains in four days on Friday, lifted by an announcement by index publisher MSCI that it would raise the weight of Chinese mainland shares in its global benchmarks.

China’s blue-chip index accelerated 2.2 percent to cap its best week since November 2015 but worries about outflows from smaller markets took Philippines shares sharply lower.

Most Asian currencies ended the week on a softer footing. A firmer U.S. dollar and uncertainty about U.S.-China trade talks left many investors anxious. The Thai baht led declines in Asia and was on track to lose about 1 percent this week.

Argentina’s peso fell 0.9 percent after the central bank said on Thursday it had changed its foreign exchange intervention guidelines to allow it more flexibility in fighting inflation.

— 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 —

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