February 5, 2018 / 8:34 AM / 4 months ago

Daily Briefing: Brexit end state; Berlin home stretch

LONDON (Reuters) - British and European Union negotiators this week hold their first formal Brexit talks since the interim deal in December unlocked discussions on their future relationship.

An anti-Brexit demonstrator waves a EU flag outside the Houses of Parliament in London, January 30, 2018. REUTERS/Toby Melville

EU chief negotiator Michel Barnier is due to meet his British opposite number David Davis in London today with their teams tomorrow knuckling down to some of the nitty gritty in Brussels, including first talks on the transition period. The criticism of British PM Theresa May's leadership within the ranks of her own Conservative Party meanwhile gets ever louder, with even the pro-Tory Spectator magazine heading its current edition "Lead or Go".

In Berlin, negotiators for German Chancellor Angela Merkel's conservatives and the centre-left Social Democrats (SPD) will try today to secure deals on healthcare and labour policy, now the final stumbling blocks in the way of another "grand coalition."

Both sides sound pretty optimistic of an accord, and a little extra cash has helped the talks so far: The parties agreed on Sunday to invest more than 2 billion euros in social housing by 2021, to spend up to 12 billion euros on expanding broadband and to channel 33 billion euros into projects including childcare.

Monday’s talks are due to focus on public healthcare, including billing rules for doctors, who now earn more by treating private patients. The SPD needs concessions on such matters for its grass roots to back the deal.

Italy's election campaign got ugly at the weekend after six African migrants were shot and injured in the city of Macerata by an attacker who last year stood as a far-right League candidate in a local ballot.

League leader Matteo Salvini, who has forged an electoral pact with former prime minister Silvio Berlusconi, distanced himself from the attack, but added that the violence was the direct result of mass immigration. Leftist politicians promptly blamed the League - which stands to make gains in the March vote - of encouraging such attacks with their anti-immigrant stance.

MARKETS

The "melt up" that gripped world stock markets in the first four weeks of the year is now being replicated in bond yields as evidence of inflation pressures emerge just as U.S. tax cuts lift growth and corporate earnings estimates for the year ahead.  And that re-rating of bonds versus equity is continuing to draw stock markets lower across the globe as overall financial volatility rises.

German Chancellor Angela Merkel of the Christian Democratic Union makes a statement before the coalition talks at the Social Democratic Party headquarters in Berlin, February 4, 2018. REUTERS/Axel Schmidt

Ten-year U.S. Treasury yields climbed to a fresh four-year high of 2.8850 percent early on Monday, still recalibrating the wage inflation outlook after news of a bigger-than-expected 2.9 percent rise in annual U.S. average earnings last month – the highest wage growth since 2009.

Underlining the fact that this is a story of growth acceleration rather than looming slowdowns, recession or even central bank tightening, the U.S. yield curve is steepening again. The 2-10 year horizon has jumped back above 70 basis points for the first time in almost three months.

The dollar is firmer as markets price in at least three Federal Reserve interest rate rises this year, starting next month. Euro/dollar was just below $1.2350 first thing Monday.

Wall Street and world equity indices had their worst day since September 2016 on Friday and the Vix volatility gauge hurdled 17 to highs not seen since then also. With the notable exception of Shanghai stocks, which closed 0.7 percent higher on decent Chinese service sector news and a firmer dollar, the rest of Asia’s bourses were deep in the red on Monday.

Japan’s Nikkei was down more than 2.5 percent, Seoul’s Kospi was down more than 1 percent and Hong Kong stocks were down 0.6 percent. The MSCI all-country world index was down 0.3 percent and on course for its first three-day run of consecutive losses since November. Even so, as an indication of the strength of the January surge, the world index is still up more than 3 percent year-to-date.

After the worst week in more than a year for European stocks, further losses were on the cards early Monday and futures were marked for an opening about 0.7 percent lower. European and U.S. service sector surveys for January are due out later, though markets will be wary that strong numbers may now be seen as another reason to prolong the selloff rather stabilise the ship.

The firmer dollar and stock market wobble has also conspired to pull oil prices lower, with Brent crude dipping briefly below $68 for the first time in a month.

Another indicator of excess in recent months is also in major reversal. Hit again by news overnight that Britain’s Lloyds bank will stop its credit cards being used for purchasing cryptocurrencies, Bitcoin continues to push further below $8,000  and is now down 60 percent from December’s peaks.

Editing by Larry King

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