October 15, 2018 / 7:38 AM / 10 months ago

Daily Briefing: Merkel allies suffer in Bavaria

LONDON (Reuters) - How toxic is it to be in Angela Merkel's coalition? Certainly both her partners performed poorly in yesterday's Bavarian election, with the right-wing CSU losing its accustomed majority and the centre-left slipping below 10 percent.

German Chancellor Angela Merkel reacts during a joint news conference with Slovenian Prime Minister Marjan Sarec in Berlin, October 12, 2018

The emergence of the far-right AfD was a clear factor but both parties also lost votes over the constant rowing in Berlin over immigration and other matters. The CSU in particular showed how to lose votes by trying to ape the populist rhetoric of the AfD.

The regional election in Hesse in two weeks’ time could now prove crucial: it will show whether Merkel’s own CDU party is also being damaged and will be a new test for the SPD. Bad performances there could start prising the alliance apart.

Failure at the weekend to break the deadlock on post-Brexit Irish border arrangements is leading to more "no deal" speculation this morning.

Now no further talks are planned ahead of Wednesday’s EU summit, which in turn raises the question as to whether that meeting can produce any meaningful progress. That in turn might prompt both sides to conclude that there is not much point in holding a further one-off summit in November to wrap the whole thing up.

A degree of brinkmanship is all part of the process but that can also be a dangerous game. UK Foreign Secretary Jeremy Hunt will be in Brussels today as part of regular foreign policy talks with EU peers; he will no doubt use the meeting to sound out any possible ways to break the impasse.

Italy's cabinet will today finalise its budget for next year envisaging a deficit at 2.4 percent of gross domestic product, well beyond what the EU says is acceptable given its existing debt. According to the process, the European Commission must then decide whether to reject the budget and demand changes, creating a stand-off with Rome.

While Italy’s bonds have sold off, the government of League and 5-Star can count on some popular support at home: A survey by pollster Demopolis on Friday showed 52 percent of Italians backed the plan, compared with 38 percent who gave it the thumbs down.


World markets have turned tail again, reversing Friday’s tentative recovery as a recovery in oil prices and rising tensions between Western powers and Saudi Arabia added to the cocktail of concerns that battered global stocks last week.

Outside of Wall Street’s main indices, emerging-market equity benchmarks, European autos and banks and more than half the constituent stocks of MSCI’s all-country world index are already in bear-market territory, as defined by drops of more than 20 percent from this year’s cycle peaks. The Sino-U.S. trade war, rising U.S. interest rates and bond yields and slowing world economic and earnings growth have all been factors.

"If they lured this man into that consulate, they went medieval on him, and he was killed and he was chopped up and they sent a death crew down there to kill him and do all of this, that would be an outrage"

On Sunday, Saudi stocks closed down 3.5 percent as the Kingdom threatened to retaliate over any measures by western governments to sanction it over the disappearance of Washington Post journalist Jamal Kashoggi. 

Many senior government and business figures and financiers, including JP Morgan Chief Executive Jamie Dimon, have now pulled out of a major Saudi investment forum. Riyadh’s insistence it will take counter-measures against any moves to punish over the affair has jarred oil markets as many had assumed Saudi would step up production to offset the loss of Iranian crude caused by U.S. sanctions on Tehran.

Brent crude, which had dipped back below $80 late last week for the first time in almost a month, rallied to almost $82 on Monday. Concern about billions of dollars of Saudi investments in western markets was also raised, not least the investments in tech stocks.

Shares in the Japanese conglomerate Softbank Group, whose nearly $100 billion Vision Fund is almost half financed by Saudi Arabia and is the world’s largest technology investment vehicle, dropped 7 percent on Monday.

Asia markets were further unnerved by the imminent report this week from the U.S. Treasury on possible currency manipulation by countries seeking to gain a trade advantage with the United States.

China has long been in the spotlight, and while most analysts don't expect China to be named, turning up the heat on the trade dispute between Washington and Beijing, there is some trepidation the Treasury may widen the list of countries it’s looking at after Treasury Secretary Steven Mnuchin indicated new trade deals with countries such as Japan would contain some form of  provision against currency manipulation.

Shanghai, Hong Kong and Tokyo stock indices lost more than 1 percent on Monday. MSCI’s emerging-market equity index was down almost 1 percent too. European and U.S. stock futures were also in the red.

Sterling fell against the dollar and euro, meantime, as UK and EU Brexit negotiators failed to reach a draft agreement late on Sunday ahead of Thursday’s critical summit on the issue, with the Irish border problem still the main sticking point. Aides to EU leaders meet again in Brussels on Monday and Irish PM Leo Varadkar meets Democratic Unionist leader Arlene Foster in Dublin.

The dollar was firmer more broadly, although nerves about global market stability saw the yen outperform and dollar/yen fell back below 112 to its lowest since mid-September. Euro/dollar was steady to a touch lower after weekend regional elections in Bavaria saw heavy losses for Chancellor Merkel’s CSU allies, largely in favour of the Green party.

Italian 10-year government bond yields and sovereign spreads over German equivalents slipped back a touch on Monday as the Italian cabinet meets on Monday to approve the controversial 2019 budget and present it to the European Commission for review.  Italian deputy PM Luigi Di Maio on Sunday ruled out any move to exit the euro, saying such talk was designed by opposition parties to scare people.

People walk in front of an electronic stock quotation board outside a brokerage in Tokyo, October 15, 2018

Portugal’s government bonds were expected to rally on Monday after Moody’s rating agency on Friday upgraded its sovereign credit rating to Baa3 and a weekend cabinet reshuffle that saw a new economy minister appointed.  

Turkey’s lira has gained almost 0.7 percent to its strongest since August since the release on Friday of U.S. pastor Andrew Brunson from house arrest, a move expected to improve U.S.-Turkey diplomatic and economic relations.

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

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