November 23, 2018 / 8:35 AM / 20 days ago

Daily Briefing: Brexit - clearing the Gibraltar hurdle

LONDON (Reuters) - Diplomats from the EU member states meet this morning to have another go at overcoming Spain's objections over Gibraltar so that the Brexit deal to be signed off on Sunday.

Prime Minister Theresa May greets Austrian Chancellor Sebastian Kurz in Downing Street, November 22, 2018

Although Madrid cannot in theory block any agreement, the Brexit moment is so historic that the last thing the EU wants is to be divided over it.

EU diplomats hope a text could be agreed by Friday evening but they also fear Spanish PM Pedro Sanchez will try to have it debated by leaders at the top table on Sunday to show voters back home his mettle ahead of a regional election next month.

All this is probably small beer next to the battle Britain's Theresa May faces to sell the deal to her lawmakers, with hardcore Brexiters describing it as outright surrender to the EU.

Weak exports drove the German economy to its first quarterly contraction since 2015 and what some economists are calling its worst performance since the first quarter of 2013.

Beyond the trade concerns, the "Dieselgate" emissions scandal and ensuing new emissions norms led to production hold-ups in the auto sector that have previously been described as a one-off; the question is to what extent that has contributed to evidence of more deep-seated weakness in consumer sentiment. Services PMI data for November out shortly will add to the picture further.

In Prague, Czech PM Prime Minister Andrej Babis’s government is likely to survive a no-confidence vote today after the junior partner in his ruling coalition signalled it would abstain.

The convoluted saga relates to allegations from opponents that he tried to hinder an investigation into whether he and family members committed fraud. The Communists have said they will continue to back Babis, meaning he will remain in power for now.

MARKETS AT 0755 GMT

With U.S. markets closed yesterday for Thanksgiving, Japan off today and a steady trickle of sombre news on the economy and trade fronts, equity markets remain weak and world stocks are set for a second week of losses.

China is leading the losses, with Shanghai down 2.5 percent at three week lows and the rest of Asia also a sea of red. Hopes are dissipating that Beijing and Washington can make real headway at talks at the G20 next weekend as U.S. President Donald Trump shows little sign of backing down on his demands and China calling for “equal mutually beneficial talks”.

There is also a report that Washington is upping the pressure on wireless and internet providers to avoid all equipment from China’s Huawei Technologies, which is weighing heavily on tech stocks in the region.

U.S. markets reopen but trade is likely to be thin and futures for the SPX are almost half a percent lower. Falls this week have put the S&P 500 tech index on track for its biggest weekly loss since March – albeit in a holiday-thinned period.

The main focus will be on Brexit developments ahead of a weekend summit and on Italy. Moves in Italian bonds have been pretty stupendous this week, with two-year yields falling below 1 percent for the first time since September. This morning the gains continue, with two year yields down another 7 bps.

The moves have been driven by expectations of some kind of compromise between Rome and Brussels but also hopes that the ECB might relaunch TLTRO cheap funding tools. The latest “positive” for the bonds is that Eurosceptic EU affairs minister Paolo Savona is reportedly considering quitting over the budget standoff. Italian shares, including bank shares, have risen for three straight weeks.

European markets will watch today’s November PMIs to see if they confirm the downbeat picture painted by last month’s data and yesterday’s weak consumer confidence numbers.

The ECB is on track to remove QE by the end of the year but more weak numbers will encourage speculation of some form of stimulus in the new year – again TLTROs is the talk in the market despite only cursory reference to them in the ECB minutes yesterday.  

On the Brexit front, sterling is holding on to gains reached yesterday on news PM Theresa May has managed to agree a draft text setting out a post-Brexit relationship though some ends still need tying up before EU leaders meet on Sunday.

Markets have shrugged off Spain’s threat to block the deal due to Gibraltar concerns and the draft is almost certain to be agreed by the EU. The dollar has pulled back another 0.3 percent against a basket of currencies but euro and sterling remain flat today, watching for more headlines on Brexit as well as the PMIs.

The growth outlook is depressing oil as well. Brent has plunged another 1 percent today to take futures prices to the lowest since last December at $61.5 a barrel. That’s down 30 percent from October highs. Futures are yet to respond to OPEC signals of supply cuts which could be as much as 1.4 million bpd.

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

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