May 18, 2018 / 7:51 AM / in 5 months

Daily Briefing: Merkel, Putin to seek common ground on Iran, US sanctions

LONDON (Reuters) - Germany’s Angela Merkel meets Russian President Vladimir Putin for talks in the Black Sea resort city of Sochi today.

German Chancellor Angela Merkel welcomes Russia's President Vladimir Putin to the opening day of the G20 leaders summit in Hamburg, Germany, July 7, 2017. REUTERS/Ludovic Marin/Pool

They have not always seen eye to eye, notably over Moscow’s annexation of Crimea.

But this time around they may make common cause over the Iran nuclear deal, criticising the Trump administration's decision to quit the 2015 pact and vowing to preserve it nevertheless.

They could also discuss a joint response in case their companies doing business with Iran are hit with U.S. sanctions.

The World Health Organization is holding an emergency meeting on the Ebola outbreak in the Democratic Republic of Congo, which now represents a "very high" public health risk to the central African nation.

Experimental vaccines are being rushed in to the source of the outbreak, which has now spread to the northwest city of Mbandaka, with a population of more than a million people.

Britain's long goodbye to the European Union limps on, the latest fudge on Britain's future in the EU customs union appearing to satisfy neither hardline Brexiteers or the EU.

Some reports suggest May will create new members of Britain’s upper house of parliament to end a string of defeats on Brexit in that chamber.

Outside of politics, the question on many lips today (in Britain at least) is: Who is going to walk Meghan Markle down the aisle on Saturday, now that her father's not coming to the wedding...?

MARKETS AT 0655 GMT

Oil at 3-1/2 year highs at $80, US Treasury yields at seven year highs, the dollar at five- month highs vs peers and Trump scolding China for being “spoiled on trade” – all this continues to roil world markets.

The dollar is flat today after days of strong gains and Treasury yields are likewise off their multi-year highs.

But the greenback has now risen for 12 of the past 16 weeks.

Ten year US yields have risen around 15 basis points this week and Brent crude is set for its sixth straight week of gains, having risen 3 percent this week.

Meghan Markle, girlfriend of Britain's Prince Harry, watches the closing ceremony for the Invictus Games in Toronto, Ontario, Canada September 30, 2017. REUTERS/Mark Blinch

All that is taking a toll on equity markets; Wall St fell last night given the inflation fears from higher oil prices and the prospect of a more aggressive Fed though Asian bourses steadied with a modest gain while MSCI all-country index is down around 0.4 percent this week.

Some of the tensions may have been eased however by a Reuters report that Beijing had offered Washington a package that would reduce the US trade deficit with China by $200 billion but trade negotiations are continuing.

Meanwhile Euro/dollar and dollar/yen hit its highest level since late January and the dollar is likewise at a four month high to the yen.

Sterling enjoyed some respite from the selling after a UK newspaper reported that Prime Minister May would tell Brussels that Britain was prepared to stay in the European Union's customs union after a transitional arrangement beyond 2021.

It’s flat on the day. Emerging currency traders must be looking forward to the weekend after a horrendous week that has seen many EM units plumb multi-month or record lows – those worst hit are the oil importers such as Turkey, Indonesia and India which are likely to see a jump in inflation and current account deficits.

The rupiah has weakened further today, unpacified by Thursday’s rate hike.

Japanese inflation data continued the run of softer than expected indicators, rising by 0.7 percent year on year in April, below the 0.8 percent that was expected.

Let’s see what German producer inflation data brings today.

European bond markets have steadied slightly after this week’s ructions that saw Italy yields jump after a report , subsequently denied, that the prospective Five Star/League coalition government had drafted an economic plan that would seek 250 billion of debt forgiveness from the European Central Bank.

However the peace looks fragile as markets await the final agreement to see what details remain in there.

Worryingly one policy will be to issue two-year debt to pay companies owed money by the states, according to a senior League official.

Two-year Italian government yields moved into positive territory on Wednesday for the first time in almost a year – the only other positive yielding  two-year government bond is Greece and this news could see a further rise.

The Italian/German bond yield spread is off 4-month peaks hit on Thursday but not far off.  

Italian 10-year yields look set to end the week up 20 plus bps – the biggest weekly jump in almost a year.

Gold has had its worst week since December 2017 – down over 2 percent

Bundles of banknotes of U.S. Dollar are pictured at a currency exchange shop in Ciudad Juarez, Mexico January 15, 2018. REUTERS/Jose Luis Gonzalez

European stocks are little changed at the end of a strong week that has put the STOXX 600 on course for its eighth straight week of gains - its longest winning weekly streak since at least March 2015.

Energy stocks have been a key driver for the gains as investors seek to take advantage from the rising crude prices by lifting exposure to a sector which has positive cash flows. Italian stocks are up half a percent.

Earnings updates will continue to drive single stocks moves, with Zurich-listed Richemont down 7 percent after the luxury goods group posted a net profit that fell short of expectations.

In the UK focus on AstraZeneca which is down 2.3 percent as generic competition to cholesterol fighter Crestor and higher costs hit the drug maker in the first quarter.

Eyes also on Italian state controlled utility Enel after Goldman took the stock off its Conviction List saying plans presented by M5S/Lega could be deflationary in our view as it would lower power bills by around 15 percent.

Stock movers: An exclusive Reuters report saying Dubai Aerospace Enterprise is in talks to buy a near-record total of 400 jetliners from Airbus and Boeing could add fuel to a rally in aero defence stocks which are among the biggest sectoral gainers in Europe so far this year.

Vivendi to review potential change in music unit’s shareholding structure, threatens to call new AGM at Telecom Italia;

Barclays activist urges trading shutdown at investment bank - sources;

Lloyds sells Irish mortgage book to Barclays for 4 bln pounds; Ryanair COO says pilot staffing situation has stabilised; FDA names drugmakers potentially acting to delay cheap generics; Natixis rises 3.5 percent after posting profit rise helped by asset management, insurance; Ubisoft is up 6 percent after it posts record profit margins in 2017/2018, driven by new releases; 

In emerging markets, currencies lick their wounds after another brutal week where higher Treasury yields and a stronger dollar exacerbated woes over soft data, with the MSCI EM currency index down more than 1 percent since last Friday close – its biggest such fall since November 2016. 

The usual suspects take centre stage, with Argentina’s peso on track for a 5 percent tumble over the week – the third week of losses of such magnitude – while Turkey’s lira nurses a 3 percent weekly drop in its third week in the red.

But South Africa’s rand, Mexico’s peso, Russia’s rouble all also on track for a week in the red.

Stocks are eking out small gains on the day but are on track for a 1.6 percent weekly loss.

The pressures are not quite filtering through to emerging hard currency debt with the JPM EMBI having widened just 1 basis point from last Friday. 

Mexico held rates overnight as expected.

A look at the day ahead from EMEA Desk Chief Jon Boyle and EMEA markets deputy editor Sujata Rao. The views expressed are their own.

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