January 19, 2018 / 8:50 AM / 10 months ago

Daily Briefing: Merkel in Paris; Berlusconi tax pledges

LONDON (Reuters) - The Franco-German motor that for years drove forward European Union has been somewhat idling of late thanks to Angela Merkel's struggle to pull together a government for a new term.

FILE PHOTO: French President Emmanuel Macron and German Chancellor Angela Merkel shake hands after a joint news conference after the EU summit in Brussels, December 15, 2017

Today, however, she visits Emmanuel Macron in Paris, where the two will discuss at least in broad outline their plans for the bloc in 2018, notably a planned reform of the euro zone.

This is, of course, a substantially different EU to the one which their predecessors have in the past managed, with Brexit and the rise of nationalist-minded eastern European leaders all presenting game-changing challenges. And Merkel no longer looks like the preeminent European leader she did through much of the past decade, with murmurings even within the ranks of her own German conservatives that she has ruled long enough.

The campaign for Italy's March 4 election is hotting up, with ex-premier Silvio Berlusconi and his rightist allies agreeing a joint manifesto pledging to cut taxes and roll back pension reform. Details are lacking but officials have previously said they would reverse 2011 legislation that called for staggered increases in the retirement age; they have also talked about introducing a single flat tax well below the current top tax rate of 43 percent. Also lacking at this stage is any maths showing how heavily indebted Italy will pay for the cuts.

It’s not often that chinks appear in the rule of Hungarian Prime Minister Viktor Orban, so a student demo against his government today is of interest. They are demanding modernisation of the education system and reforms before an April 8 election, where Orban is expected to sweep back into power.

MARKETS

A U.S. government shutdown looms at midnight unless the Senate passes a bill needed to keep government functioning until Feb. 16. A shutdown is in no one's interests, so chances are the bill will pass. But while the bill hangs in balance today, it's tense times for the dollar.

However, in Asia this morning, markets are marching to a different beat. Stocks are at a record high, set for their sixth straight week of gains. World stocks are just off record highs, but still headed for  their eighth week in the black. And that's despite the weak Wall Street close last night. 

Clearly, Thursday's data showing Chinese growth accelerating for the first time in seven years is a more potent counterweight to the shutdown fears. Earnings were mixed last night with Morgan Stanley beating and Alcoa falling short of forecasts.

U.S. Treasuries, meanwhile, saw yields rush above 2.64 percent to the highest since September 2014, dragging up Bund yields as well. Spain will be in the spotlight; an expected ratings upgrade saw its spreads over German Bunds fall on Thursday to their tightest since August 2017.

The dollar is the main victim of the U.S. wrangling, trading just off three-year lows against a basket of currencies and set for a fifth week of losses. The euro is up around 0.3 percent, holding just off three-year highs.

Sterling is likewise firmer after climbing to $1.39, its longest weekly winning streak since 2014, thanks to dollar weakness and optimism over a favourable divorce deal with the EU. One bank predicts it will reach $1.47 by the end of the year. Watch retail sales due later in the day. Bitcoin is up 1 percent after slumping under $10,000 on Thursday for a loss of around 40 percent from December peaks.

European shares are expected to open little changed after a directionless week that has seen the regional STOXX 600 benchmark steady around  a 2 1/2-year high as confidence over economic and earnings growth helped consolidate a strong start of the year. EPFR Global said it was a good week for European equity funds, with inflows into Sweden and the UK more than offsetting outflows from France and Italy. Futures were last up 0.1 percent.

UK shares in Carpetright and Dignity might be hit after both issued profit warnings. French spirits group Remy Cointreau is seen rising after like-for-like sales growth slowed to 3.2 percent but topped expectations.

Also likely to move: Nestle nominates three board directors to help advance strategy; Deutsche Bank CEO says overhaul will take time; Software AG takes hit on U.S. tax reform; BASF says 2017 adjusted EBIT up 32 percent on basic chemicals; Thyssenkrupp CEO says will sharpen strategy - Handelsblatt; Daimler, Bosch hit by walkouts in sector-wide labour dispute; Airbus says supplier bottlenecks easing as deliveries rise; HSBC to pay $100 million to settle U.S. investigation into currency rigging; TF1 announces agreement on acquisition of Aufeminin from Axel Springer; Italy's Geox to name top Gucci executive as new CEO.

Editing by Larry King

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