March 11, 2019 / 8:42 AM / 2 months ago

Daily Briefing: Brexit talks deadlocked before crunch vote

LONDON (Reuters) - With Brexit talks between London and Brussels deadlocked before tomorrow's parliament vote on PM Theresa May's deal, some senior Conservative lawmakers are urging her to postpone the vote yet again to avoid a further humiliation, local media report.

People pose with their dogs during the 'Brexit Dogs Dinner' protest outside the Houses of Parliament, March 10, 2019
"There is wind in the sails of people trying to stop Brexit. We are in very perilous waters"

May’s plane is on standby to head to Brussels for crisis talks, but there has been no confirmation as yet that she plans to use it: the Brexit uncertainty looks set to continue down to the wire.

News emerging on the euro zone economy confirms the rationale for the European Central Bank's move last week to delay raising interest rates and prepare a new round of stimulus in the shape of cheap loans to banks.

A plunge in car production drove an unexpected 0.8 percent drop in German industrial output in January, even as Handelsblatt reported that the government has yet again revised its internal growth outlook for Europe's biggest economy in 2019 to 0.8 percent - weeks after it slashed the target to 1.0 percent from 1.8 percent.

The region's second- largest economy is even more sluggish: The Bank of France has this morning trimmed its forecast for French first-quarter economic growth, estimating just 0.3 percent compared with 0.4 percent before.

Elsewhere, euro zone finance ministers meeting in Brussels today must decide whether Greece has sufficiently delivered on promised reforms to get the latest 750 million-euro disbursement from the euro zone.

The money is part of about 4.8 billion euros of profits from Greek bonds held by euro zone central banks, to be handed back to Athens by mid-2022 on the proviso that Athens continues with painful reforms adopted under its three bailouts since 2010.

On Feb. 27 the European Commission concluded it had not done enough to gain access to the cash but said it could still get it if it stepped up reforms fast. Last week, Greece again offered for sale three state-owned coal-fired power plants that failed to attract satisfactory bids the first time around.

MARKETS AT 0700 GMT

After its longest losing streak of the year, MSCI’s all-country index of world stocks ended five straight days of losses on Monday and nudged about 0.1 percent higher – helped by comments from Peoples Bank of China chief Yi Gang on Sunday that indicated further monetary easing was in the pipeline to shore up the weakening Chinese economy.

Shanghai stocks rebounded almost 2 percent, with Hong Kong and Tokyo also higher. There was little new from Sino-U.S. trade talks, with reports repeating that progress is being made but some distance remains between the sides. No date for a summit between the two countries has been set.

The wider theme of central bank easing has dominated again over the past week after the European Central Bank surprised with a new cheap lending stimulus and pushed its timeline for an interest rate rise into next year as it cut growth and inflation forecasts. The dovish ECB stance unnerved markets to some extent by signalling central bank alarm at the weakness of the underlying euro economy.

News on Monday of unexpected 0.8 percent drop German industrial output in January only reinforced those concerns and the Bank of France also trimmed its first-quarter growth numbers to 0.3 percent from 0.4 percent.

Following a surprisingly weak headline February U.S. payrolls number on Friday, Federal Reserve chief Jerome Powell said again over the weekend the Fed was determined not to move interest rates again until it saw more on how the economy was performing. Powell indicated the Fed would lay out plans to end its rundown of assets on its balance sheet at its meeting next week.

The release later on Monday of January U.S. retail sales numbers will be crucial after sales dropped the month before. Euro/dollar was $1.12 first thing Monday, well above the near two-year low set after the ECB meeting last week.

The dollar’s DXY index and dollar/yen were higher, with sterling down for a ninth day in a row against the dollar as it heads into another critical week in the Brexit impasse. No breakthrough emerged from weekend talks between the UK government and the European Union over changing elements of the existing Brexit agreement related to the Irish border.

UK PM Theresa May is now widely expected to lose another parliamentary vote on her negotiated agreement on Tuesday evening. If so, Wednesday will see a vote on whether parliament wants to leave the EU without a deal – with a majority expected to refuse. A third vote would then be set for Thursday on whether the UK should request from the EU a limited extension of the March 29 Brexit date.

Separately, the Financial Times reported on Monday that the Bank of England had asked UK banks to triple their liquid assets in the three months around Brexit as a precaution for any hiatus in interbank lending. Sterling was also lower against the euro first thing.

Elsewhere, European stocks were marked higher, as were MSCI’s emerging market equity and currency indices. Brent crude prices gained as Saudi Arabia said it would cut crude output in April.

Turkey's fourth-quarter gross domestic product shrank 3.0 percent year-on-year versus estimates for a drop of 2.5 percent - raising questions about monetary policy response and sending the lira lower first thing.

Boeing’s share price was down more than 7 percent in Frankfurt trading after an Ethiopian airlines crash on Sunday.

On the European corporate front, battered banks will remain in focus after fresh speculation at the weekend over a possible merger between Deutsche Bank and Commerzbank. Shares in both were seen opening up more than 2 percent.

But prospects for the sector, already struggling after years of ultra-low interest rates, appear to have worsened after the ECB pushed out the timing of its first post-crisis rate increase, and M&A could be a way to help banks cut costs and withstand further margin pressure as the economy worsens.

A source told Reuters, however, that any tie-up between the two German banks would probably result in a multi-billion-euro hole because a switch in bank ownership legally triggers a revaluation of assets such as government bonds.

— 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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