July 9, 2018 / 7:49 AM / 3 months ago

Daily Briefing: Eyes on May government after Davis quits

LONDON (Reuters) - British PM Theresa May's attempt to impose cabinet discipline around a softish Brexit solution lasted about 48 hours before being shattered by the resignation of Brexit minister David Davis last night.

FILE PHOTO: Britain's Secretary of State for Exiting the European Union David Davis leaves 10 Downing Street, July 2, 2018

This raises questions both about the future of May’s government and what happens next on Brexit. Leading Brexiters in her Conservative Party are already warning that with the departure of Davis, a diehard Eurosceptic, she will find it harder to win party backing for any diluted form of Brexit.

Yet sterling has risen this morning, which suggests some in the markets see a competing interpretation - one in which May is gradually picking off the hard Brexiters. There are also growing calls from the Remain side for a second referendum on whatever finally emerges as the Brexit deal.

Much could hang on the next day or so, with interest focused in particular on what Foreign Secretary Boris Johnson decides to do: if he resigns too that could spell trouble for May’s leadership. The months-long limbo on Brexit may finally be nearing an end.

Spanish Prime Minister Pedro Sanchez will hold his first meeting today with pro-independence Catalan leader Quim Torra. While Sanchez has taken a less hardline tone on Catalonia than his predecessor Mariano Rajoy, he has made clear he is resolutely opposed to any independence referendum or attempt at secession.

He has made a gesture of goodwill by saying he is open to moving jailed Catalan separatist leaders closer to home but other concessions may prove few and far between today.

France’s Emmanuel Macron addresses both the upper and lower houses of the French parliament at a special session in Versailles today, a once-rare event of which he has made an annual tradition.

This has led to critics accusing him of behaving like a monarch and has fed into the public perception of him being a bit too distant and out of touch. Yet despite his poor poll ratings, Macron can point to rising foreign investment and a solid economy as evidence that his reform plan is on track.

MARKETS AT 0729 GMT

World markets’ penchant for seeing the glass half full continues to play out. Even as a trade war between the United States and China effectively kicked off on Friday, investors have stayed focused on a stream of upbeat economic activity readings from around the globe and also on signs that the British government was finally opting for a softer form of Brexit than many in financial markets had feared.

Service sector business from across the world last week impressed markets but it was the warm glow from Friday’s U.S. June employment report that dominated first thing as investors await this start of the second-quarter corporate earnings season.

Above-forecast jobs creation, rising labour market participation and modest wage growth buoyed optimism in U.S. economic demand without anxiety the Federal Reserve would have to get more aggressive in its monetary tightening to keep inflation in check.

Not only did this allow the S&P500 to rally almost 1 percent on Friday, it has also seen the dollar ease back somewhat and taken pressure off many emerging currencies – not least China’s yuan. Asia’s bourses continued that rally overnight – with Shanghai stocks bouncing more than 2 percent, Japan’s Nikkei and HK’s Hang Seng up more than 1 percent and Seoul’s Kospi up 0.6 percent.

European and U.S. stock futures were both up 0.5 percent first thing, with a better-than-expected German export reading for May adding yet another positive economic data point to offset all the trade tariff worries.

Seasonally-adjusted exports rose by 1.8 percent during the month, more than twice the rate forecast and widening Germany's trade by more than a billion euros from April – itself likely to flatter second-quarter growth estimates. Euro/dollar pushed to its highest since June 14, with European Central Bank chief Draghi testifying to the European Parliament later on Monday.

Sterling continued Friday’s rally, meantime, rising to its highest level since June 14 after UK PM May got cabinet agreement on the set of Brexit negotiating proposals to keep some form of free trade area with the European Union after Britain formally leaves the bloc.

The move led to the resignation of her hardline Brexit secretary Davis late on Sunday, but this had little impact on the pound. Concern about how many other ‘hard Brexit’ supporters within the cabinet will also resign now is likely to limit the currency’s gains for now.

Sterling hit a high of $1.3326 in early London trade on Monday – up more than half a cent from late Friday afternoon levels. Euro/sterling was steady to a touch lower compared with Friday.

— 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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