September 3, 2018 / 7:44 AM / 20 days ago

Daily Briefing: Brexit no-deal worries climb

LONDON (Reuters) - Whatever optimism financial markets were exhibiting about Brexit last week seems to have melted away today as various comments over the weekend focused minds once again on the threat of a no- deal exit.

FILE PHOTO: Britain's Secretary of State for Exiting the European Union Dominic Raab and the European Union's chief Brexit negotiator Michel Barnier brief the media after a meeting at the EU Commission headquarters in Brussels, August 31, 2018

In a German newspaper interview, European Union negotiator Michel Barnier firmly rejected British PM Theresa May's compromise proposal, essentially saying it was a variant on the "cherry-picking" of EU rules that Brussels has opposed from the start.

In any case, his former UK counterpart David Davis also said he would vote against parliament giving May’s exit plan its required approval. If other Brexit-minded Conservatives do the same, May’s plan is sunk.

Fitch’s move on Friday to cut the outlook on Italy’s state borrowing to “negative” from “stable” has highlighted the divisions within the Rome government.

While Economy Minister Giovanni Tria promised that EU budget commitments would be respected, Deputy Prime Minister Luigi Di Maio insisted he would follow through from next year on his party's main campaign pledge - a universal income. "We'll always choose Italians first," he said, arguing their needs came before pleasing ratings agencies.

This morning's batch of manufacturing PMIs for August are starting to come in. The euro zone reading due shortly is expected to remain steady at 54.6 while the UK figure is forecast to ease slightly.

MARKETS AT 06:55 GMT

Emerging markets started the week under pressure yet again, with MSCI’s benchmark emerging-market equity index down for the fourth straight day and losing almost 0.5 percent amid rising trade tensions.

The United States is set to impose 25 percent tariffs on $200 billion of Chinese goods once a public comment period ends on Thursday and there was little sign that would be averted.

U.S. markets are closed on Monday for the Labor Day holiday, so Shanghai and Hong Kong markets took the heat again, with the former down 0.3 percent and the Hang Seng down 0.7 percent – weighed by another near 3 percent fall in Tencent Holdings amid China’s crackdown on online gaming.

The dollar was more subdued, but Indonesia’s rupiah dropped to its lowest levels since the financial collapse of the late 1990s despite ongoing central bank support. Jakarta’s main stock index was down 0.7 percent and South Korea’s Kospi down by a similar amount.

Turkey’s lira also fell again, to 6.74 per dollar, after August’s inflation rose to a 14-year high of 17.90 percent from 15.85 percent in July - stoked by the near 25 percent drop in the currency last month alone. Producer prices rose a whopping 32 percent year-on-year.

Italian 10-year government bond yields and borrowing premia over Germany held just below the intraday highs of May after the rating agency Fitch downgraded the outlook for Italy’s sovereign credit rating to negative on Friday, as widely expected.

Speaking in Shanghai on Saturday, Economy Minister Tria said the government would address the concerns raised by Fitch about higher budget spending and respect its European Union commitments.

Deputy PM Salvini restated his tax cut pledge at the weekend but said on Monday he wants the budget deficit target next year to be close to but below 3 percent of gross domestic product.

Euro/dollar was a touch higher, above $1.16, after Friday’s retreat following below-forecast euro zone inflation numbers for March. With one eye on the trade jitters, European stocks futures were down about 0.2 percent.

Sterling was weaker against the dollar and euro after reports EU negotiator Barnier rejected the UK’s current Brexit proposals. Traders are also eyeing Tuesday parliamentary testimony from Bank of England Governor Mark Carney amid speculation that he may extend his role as governor beyond July 2019.

— 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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