December 15, 2017 / 8:30 AM / a month ago

Daily Briefing: EU peers applaud "best we've got" May

LONDON (Reuters) - Today’s session of the EU summit in Brussels will see leaders confirm Britain has made enough progress on Brexit divorce issues to move into the next phase of negotiating its transition out of the club and the outlines of a future trade deal.

The gathering so far has yielded few surprises but there have been some interesting insights along the way. British PM Theresa May was warmly applauded by her European peers at dinner last night for having got the negotiations to where they are now; and one EU official noted the rest of Europe is quite keen to see her carry on in her job, viewing her as "the best we've got" compared to other premier hopefuls in the British cabinet.

Separately, several leaders also warned pro-European rebels in the Westminster parliament that their push to have a final say on the Brexit deal might backfire, noting there would be no appetite among EU capitals to return to the negotiating table if an initial deal was rejected - effectively meaning Britain would crash out without any deal at all.

Away from Brexit, there was also an unseemly row over migration, with the new leaders of Czech Republic and Poland confirming their countries' rejection of EU quotas for receiving a share of the hundreds of thousands of new arrivals to Europe over the past two years. This type of split has only emphasised some of the deeper divisions that exist between east and west over what European Union is about.

Germany’s Angela Merkel bemoaned what she called “selective solidarity”. And a breakfast meeting of leaders this morning will focus on plans to revamp the euro zone but no decisions are due to be made - not least because of sharply differing views on most of the topics and the lack of a new government in Germany.

After yesterday's strong PMI numbers for the euro zone and the sharp Ifo upgrade of prospects for the German economy, the Bundesbank struck a more cautious tone this morning, warning that growth is likely to slow beyond next year as the business cycle matures. This is the second reminder we've had this week that the single currency zone's current buoyant fortunes will not last forever.

Newly elected Eurogroup president Mario Centeno suggested on Thursday that euro zone leaders should start bracing for a cyclical downturn around the middle of 2019 - by which time, moreover, the ECB will not be pumping cheap money into the economy at the pace it is now.

GLOBAL MARKETS

Two days after the Federal Reserve’s third interest rate rise of the year and, world stocks are seesawing around flat amid trepidation on whether the U.S. tax cut bill, the vote on which is due next week, will actually pass. Those concerns pushed Wall St lower, despite robust retail sales data. Stocks are however on track for a third week of small gains.

The dollar is set for a weekly loss after the Fed’s message of “three hikes in 2018” which has also flattened the Treasury 5-30 yield curve to just off the 57.3 bps 10-year low hit recently while the 2-10 curve is again inching back towards the flattest levels on record. Japan’s Nikkei225 also closes lower for the week, shrugging off a BOJ survey showing manufacturing business confidence at an 11-year high. Elsewhere in Asia, China’s CSI300 fell more than 1 percent and Shanghai is down for the fifth straight week after this week’s policy tightening move.

The dollar has taken a bit of a hit from the doubts about the passage of the tax cut bill. The euro responded to comments from ECB President Mario Draghi on Thursday by initially hitting 9-day highs then turning tail as his upbeat message on growth and inflation was accompanied by a pledge to keep up stimulus as long as necessary. The Norwegian crown has ceded some of its massive gains triggered after the central bank brought forward prospective rate rises to end-2018. The Aussie dollar is benefiting from upbeat local jobs data, hovering close to five-week highs to the greenback.

Sterling, which had been trading at near-one week highs to the dollar, slipped after the BoE’s “one-and-done” message on interest rates. But the currency is up around 0.4 percent on the week and could also get some traction later in the day when EU leaders are expected to endorse the start of the second phase of Brexit talks.

European bonds took a small beating after Draghi’s growth optimism, despite his pledge to keep up stimulus as long as needed. - especially given PMIs show the bloc is ending 2017 at a 7-year high.

European shares are expected to open marginally lower with stock index futures down 0.2-0.5 percent. The STOXX 600 is set to end the week flat to slightly lower as resurfacing worries over possible political risk in the region have offset continued optimism in its economic recovery, spurring profit taking. The pan-European index is 2.3 percent below the two-year peak hit at the start of November.

Editing by John Stonestreet

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