May 17, 2019 / 7:59 AM / 2 months ago

Daily Briefing: Europe awaits Trump move on autos

LONDON (Reuters) - Donald Trump has until Saturday to decide whether to impose tariffs on imported cars and auto parts from Europe and elsewhere, based on the findings of his administration that such imports are a national security threat.

The decision comes at a prickly time for Washington and Europe - they are already bickering over other commercial issues, from arms trade to whether China's Huawei should be excluded from telecom infrastructure projects.

The betting, however, is that Trump will delay the decision later today for six months, to leave room for further talks and, from his point of view, try to keep the heat on Europe. How to respond will be in the hands of the entirely new European Commission and parliament, which should be in office by then.

According to local media reports, another significant milestone in the long and winding Brexit saga is about to be reached with the imminent collapse of cross-party talks between Conservatives and Labour to find a compromise. If that happens, the next step is to organise a series of test votes in parliament to work out whether there is any Brexit formula at all which could come close to finding a majority there.

An anti-Brexit protester stands next to Brexit Party campaign placards outside the Houses of Parliament, May 16, 2019. REUTERS/Toby Melville

In parallel, Theresa May's premiership now looks to be drawing to a close after a last-ditch vote on her Brexit deal in early June, which she is widely expected to lose again, with Boris Johnson now publicly confirming he wants to succeed her as party leader and hence prime minister.

"There are only two ways out of the Brexit crisis that we’ve got: either parliament agrees a deal or we go back to the British people and ask them to make the choice"

A Johnson leadership would increase the chances of a no-deal Brexit, which this parliament has voted to exclude, so the logic would then start lurching towards a snap general election.

Meanwhile, the Swiss have also to decide how far they are prepared to compromise to enjoy the benefits of a close relationship with the EU. Its voters will take part in a binding referendum on Sunday to tighten weapons ownership laws in line with EU steps to fight terrorism.

Should it be rejected, Switzerland could be excluded from agreements on the Schengen zone, which allows free travel across Europe’s national borders.

MARKETS AT 0655 GMT

It looked earlier this week as if we might be entering a period of phony war. Markets started on a horrible note on Monday but appeared to have steadied somewhat, despite President Donald Trump’s action to effectively ban Chinese telcos Huawei and ZTE from the United States.

This morning, tough talk by China’s Communist party newspaper suggested the war risks are escalating. That led to a 2% selloff in Shanghai, sending Asian shares almost 1% lower. MSCI’s world shares index is flat today and looking at a weekly loss for the second week in a row, down 1.5% so far this week.

Safe-haven bond are rallying again. And what with economic growth worries, European Parliament elections next week, trade tensions and the Iran-U.S. flare-up that’s driving up oil prices, the mood is far from buoyant. The yen has risen again and European shares are opening lower.

The mood was different yesterday. New York closed on a chipper note after housing starts turned out surprisingly strong and the Philadelphia Federal Reserve's survey showed a manufacturing pickup. On the corporate front, Walmart reported upbeat results (though it did warn that trade wars would lead to higher prices).

Of the S&P 500 companies, about 75% so far have beaten profit expectations, according to Refinitiv data. All that helped lift U.S. bond yields, especially after Fed officials suggested the bank is in no hurry to cut interest rates. But 10-year yields, which rose back to 2.40% percent last night, have slipped back this morning.

In Europe, Bunds are again catching a bid, with yields falling back under minus 0.10%. Europe also has Italy to contend with. Italian yields are off recent three-month highs, but the noise continues with Deputy PM Matteo Salvini threatening yesterday to "tear apart" EU budget rules.

All this looks suspiciously like posturing before EU parliament elections. Big gains for Salvini’s party could well embolden him to ditch the coalition and go it alone, which means fresh elections. Watch this space.

On currencies, we saw the dollar gain, boosting it to two- week highs, though it is showing signs of pulling back. The week’s worst performers include sterling, down 1.6% for the week, and the Aussie, which has lost 1.5% — one a victim of Brexit politics and the other of trade war/rate cut expectations.

The yuan has tanked to its lowest this year and has lost 3% this month, on track for its worst month since June 2018. Yuan-dollar weakness has weighed on the euro, which has lost 0.5% this week after two weeks of gains.

There’s been a bit of drama on Bitcoin which sank more than 20% in Asian trading, falling off 10-month highs – currently the move is being attributed to profit taking after the sudden gains. It’s currently down 8%.

The data front looks a bit light today  — euro zone final inflation could be revised higher and U.S. consumer confidence may be interesting after last week’s dismal retail sales figures.

European shares were sliding back on Friday, after a U.S. rally drove them up to their best day in three months. The market is far from recovering its losses since the start of May and the resurgence of a U.S.-China trade war.

The fall in the Chinese yuan below 6.9/dollar and the loss at Baidu could both be part of the drag on investor sentiment, which was partly boosted yesterday by strong results from Walmart and Cisco. Traders point to low volumes as one sign investors aren’t convinced by the rally.

Corporate results continued to trickle in. EasyJet shares are up 7% even though it warned of a tough trading environment, as traders pointed to in-line first half revenues. Just Eat is down 8% and Takeaway and Delivery Hero have fallen 4%, after Deliveroo confirmed Amazon was leading a Series G $575 million funding round in the company.

Luxury goods group Richemont said sales of its watches and jewellery both grew 10% in the year to the end of March with the Americas and Asia performing well. But traders said its operating profit and margin fell short of expectations, and saw the stock falling 3% to 4%. Vallourec shares were expected to jump as much as 10% after the steel pipe maker reported a smaller first-quarter loss and confirmed its financial targets for the year.

A decision by France's top constitutional court to clear privatisation of airport operator ADP should boost the shares, although they could remain under pressure as opposition lawmakers seek a referendum to overturn the legislation. News of plans for a public vote tanked the stock last week.

Credit Suisse set up a family office services unit for China's rich; a court said GSK and Novartis's liniment marketing misled Australian consumers; investors are pushing BP to step up its fight against climate change; and UK software firm Sage said it expects revenue growth at top end of its forecast.

In emerging markets, stocks are heading for a second week of declines, the MSCI EM currency index has lost all its gains for the year to date; and the Turkish lira is set for a seventh week of losses against the dollar. Brent crude is holding above $73 a barrel.

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

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