November 9, 2018 / 8:36 AM / 8 days ago

Daily Briefing: Brexit end-game provokes DUP anger

LONDON (Reuters) - As Theresa May prepares for a working lunch on the Brexit end-game with France's Emmanuel Macron, there is trouble back home.

FILE PHOTO: A British and a European flag are pictured ahead of the European Union leaders summit in Brussels, October 17, 2018

The Northern Irish DUP suspect May is on the verge of accepting an EU demand that, if all else fails, the province would remain in a customs union with the EU - effectively hiving it off from the rest of the UK. That suspicion has, ironically, hardened despite May's efforts in a leaked letter earlier this week to persuade them of the contrary.

This is serious because current parliamentary arithmetic suggests the only way May could get a Brexit deal through parliament is if the DUP are on board.

What is not clear is whether this latest row is a major problem or a bit of stage management to heighten the drama before a minor concession of some kind. In any case, a Reuters poll shows that still only one in four economists believe the outcome will be "no deal".

Some 35 percent of members of the two conservative parties in Germany's ruling coalition favour Annegret Kramp-Karrenbauer, a protege of Chancellor Angela Merkel, to replace her as leader of the Christian Democrats, a survey shows. That is barely two points ahead of the proportion who backed businessman Friedrich Merz, while a mere 7 percent favoured Health Minister Jens Spahn.

That suggests the race to succeed Merkel could get pretty hot between now and a decisive congress in December. While Kramp-Karrenbauer - widely known as AKK - is more of a continuity choice, the right-leaning Merz is the one grabbing attention with his blunt utterances.

His acknowledgment yesterday that a weak euro benefits Germany was in itself astonishing - almost a taboo subject for German leaders - as was his follow-up point that it is also too strong for some other euro zone economies. His wider point that Germany therefore has a responsibility to "contribute more" to holding the EU together has fascinating implications.

MARKETS AT 0755 GMT

Aside from a comment on a dip in business investment, the Fed’s message yesterday was as expected – signalling that rate rise intentions remain intact for December and pointing to strong job gains/household spending. Yet it’s shaken up things a bit.

The dollar index was lifted to one-week highs, the biggest one-day gain since August and set on track for a fourth straight week of gains. This morning it is in positive territory again and taking a toll on world markets, with Asian equities down 1-2 percent overnight and futures signalling sharply weaker sessions in Europe and the United States.

The Fed message also took 10-year Treasury yields as high as 3.24 percent while shorter-dated maturities tested recent 10-year highs, flattening the yield curve again. That knocked world stocks off three-week highs and, while still reeling today, they remain on course for a second straight week in the black, thanks to knee-jerk gains following the U.S. mid-terms.

Wall Street also fell on Thursday but the S&P500 has enjoyed its best week since March and despite some wobbles - about Apple in particular - the S&P tech index has likewise had a good week so far.  

But this morning there are fresh worries. Chinese inflation data indicates cooling domestic demand and manufacturing activity – consumer prices rose at the same pace as in October and factory inflation slowed for the fourth straight month.

That’s spurred fresh expectations of stimulus to buck up the economy – clearly they have the room to do that – but coupled with the Fed’s hawkish message, it’s taken the yuan lower. The Chinese currency is at a one-week low and is set for its worst week since July.

That in turn is pushing emerging currencies lower, hurting stock markets in Asia and Europe and fuelling buying interest in bonds. Treasury and Bund yields have eased this morning.

Sterling continues to swing to the ebb and flow of Brexit news but today’s construction and Q3 GDP data could also impact it. Expectations are for 0.6 percent Q/Q growth but that would be virtually irrelevant if other Brexit news emerges.

Also on the data front, there is the University of Michigan survey in the U.S. and PPI. The euro and euro zone bond yields are being pushed lower by Mario Draghi, who said late Thursday that the ECB’s policy guidance can be changed if the outlook darkens.

European shares are set for a weaker open after hopes of an implicit “Powell Put” were dashed. But there’s a big enough batch of earnings to animate the session. 

After positive results yesterday in the banking sector, Allianz has announced a 24 percent jump in net profit. Headlines are less rosy for UBS, sued in the U.S. in an alleged crisis-era mortgage securities fraud.

In the UK utilities sector, Energy supplier SSE and Innogy are discussing changes to the terms of a planned tie-up of their retail units, after Britain's regulator proposed a price cap on default energy bills.

In Germany, Thyssenkrupp cut its profit outlook for the second time this year, blaming provisions for an ongoing steel cartel probe and quality issues at its automotive unit, the latest in a string of bad news for the group.

Emerging market shares came back down to earth with a bump as heavy falls in China, Russia and South Africa after an even more brutal overnight season for Latin America also ended a solid run of weekly gains.

FILE PHOTO: Chancellor Angela Merkel's protege, Annegret Kramp-Karrenbauer, leaves a news conference to promote her candidacy to succeed the German leader as chief of their conservative Christian Democrats in Berlin, November 7, 2018

Currencies including the rand and the Turkish lira were back in the red against the dollar after the Fed comments, while the yuan was at an eight-day low.

Meanwhile, oil prices have slumped into a bear market, down 20 percent from four-year highs hit just a month ago. Brent is so far looking at a weekly 3 percent decline.

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

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