LONDON (Reuters) - A regional election in the large German state of Hesse this weekend is the latest hazard for Angela Merkel’s bickering coalition government, with both her conservatives and her centre-left SPD partners expected to shed votes.
For the SPD in particular, its declining poll fortunes are becoming an existential crisis - so much so that it has started asking whether it should step back into opposition.
Merkel’s party is warning the SPD that it would likely call a snap election in that case - something which opinion polls suggest would be devastating for the two mainstream parties.
In Hesse, much of the focus will be on the performance of the far-right AfD, but particularly the resurgent Greens, whose charismatic half-Yemeni leader could turn out to be the kingmaker in forming the next regional government there.
Austria is using its role as the current holder of the EU presidency to call for an arms ban on Saudi Arabia in the wake of Jamal Khashoggi's murder.
Germany, which has already said it is halting its relatively modest arms supplies to the Saudis, is in favour: the question is how more major suppliers such as the UK and France respond.
The UK’s scheduled departure from the EU means it would not in any case have to join any EU move on the matter; France could block it if it chose.
President Emmanuel Macron told Saudi King Salman on Wednesday that France could take action against those held responsible for the murder. However, since coming to power last year Macron has largely ignored protests over arms sales he deems vital to jobs and France's strategic relationships in the region.
So last night’s Wall Street rise was probably a dead-cat bounce after all.
Asian markets are a sea of red this morning, Europe is opening weaker and U.S. futures are sharply lower.
We had less than scintillating earnings from Amazon and Google, which led to an after-hours slides by their shares, and markets are also worrying about China where despite stock markets are down sharply and the yuan is sliding towards the key 7 per dollar mark -- it reached 6.98, the weakest since January 2017 and brought out the PBOC this morning to threaten "targeted steps" against those shorting CNY and promise macro-prudential measures.
But there is also the issue of central bank policy tightening – the ECB’s Mario Draghi signalled yesterday it is unlikely the bank will hold off removing stimulus by year-end despite signs of slowing growth and the troubles in Italy.
With the economic growth picture darkening, attention will focus today on U.S. third-quarter GDP. Some investors reckon the tailwinds from tax cuts and repatriation are already weakening, as highlighted by the recent lacklustre durable-goods orders.
World stocks are set for a fifth straight week of losses, the longest losing streak since 2013, and look on track for their worst month in seven years.
The S&P500 is just 1 percent off losing all its gains for the year.
Emerging-market equities are down 20 percent and heading for their worst year since 2011 and worst month since May 2012.
With more earnings due, including from emerging-market-focused consumer goods bellwether Colgate Palmolive and industrials such as Goodyear Tyres and Rockwell Collins, investors are hypersensitive to the beats/misses but also to forward guidance from companies.
All those fears are pushing investors back into bonds, with U.S. 10-year yields down towards one-month lows, while German yields are at the lowest since Sept. 10, having slipped 11 basis points this week.
Italian yields are up before Italy’s rating review by S&P.
Views are mixed on what will happen, but hopes are the agency will content itself with merely downgrading the outlook on the rating to negative, leaving it two notches above investment grade.
It may cut the rating and keep the outlook stable – also not too bad. On the Brexit front, a source-based Bloomberg report that said talks had stalled sent sterling briefly lower overnight but it’s flat now and awaiting more headlines. Other currencies are reflecting the risk off – yen and Swiss franc have risen, the Australian dollar and emerging currencies are lower.
The dollar hit 2 1/2-month highs yesterday but is now flat.
On European stocks, it looks set to be a day of heavy losses – down 1 percent or more across various bourses- after U.S. futures tumbled following results from Amazon and Alphabet and prompting renewed concern about the dominance of tech in this market cycle.
Car parts maker Valeo could fall the most, though - it's indicated down as much as 10 percent after its results missed estimates by 22 percent and it slashed guidance for next year by 11 percent.
The warnings echoed Daimler’s and others in the auto sector flagging disruption from tougher European emissions tests and slower sales in China, and the sector could be bruised as a result.
Stronger results from British Airways owner IAG could help the travel and leisure sector, which has been under pressure with airlines warning of fuel costs rising. With some analysts citing a report Brexit talks are in deadlock, Britain’s FTSE 100 will be a focus and has opened 1 percent lower.
RBS shares are down 4 percent after it said it had taken a 100 million-pound impairment provision to account for greater economic uncertainty, the first concrete sign Brexit is clouding the outlook for banks.
Healthcare could also be under pressure after U.S. President Donald Trump said he planned to base Medicare drug prices on lower overseas rates.
Of the Europe-listed pharma names, Roche, Ipsen, Grifols and UCB have the biggest exposure to the U.S. Medicare Part B, according to Goldman Sachs.
In company news and stock movers: Britain's RBS puts cash aside, warns of economic uncertainty; BA owner IAG's Q3 profit slightly beats market estimates; Volvo Cars Q3 income falls due to launch costs, higher tariffs; Spain's Caixabank Q3 net profit down 27.6 percent due to Repsol sale; asset manager Amundi reports higher Q3 profits; Signify beats expectations with 8 percent rise in Q3 core profit; UBS CEO Ermotti won't rule out M&A, says options are limited; Volkswagen readies truck business Traton for stock market listing; Brewer Ambev squeezed by Brazil competition, Argentina inflation; AIG receives UK approval for Brexit restructure; Freenet open to offers for its $1 billion stake in Sunrise; NordLB stake sale sparks merger talks among German public sector banks; Lufthansa eyes divestments of non-core businesses.
In emerging markets, two key events are due at the weekend - the second and final round of elections in Brazil, where right- wing Jair Bolsanaro, the market’s preferred candidate, looks almost certain to win.
Brazilian assets have been scorching hot, so the question is whether this is a classic case of buy the rumour, sell the election win fact – Brazil’s real is up for sixth straight week.
The second is the conclusion of a public vote in Mexico on whether to give up on its half-built, white elephant of a new airport.
It is seen as a test of incoming President AMLO’s business credentials.
The Mexican peso is down for fourth straight week and the Turkish lira is flirting with a third straight week of gain
Russia's central bank meets today and should keep rates unchanged at 7.50 but the rouble's recent decline and rise in inflation expectations could see a 25 bps hike from the hawkish bank.
A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets deputy editor Sujata Rao. The views expressed are their own.
(Editing by Larry King)