June 18, 2018 / 7:50 AM / 3 months ago

Daily Briefing: German migration stand-off goes European

LONDON (Reuters) - It looks as if Chancellor Angela Merkel may have won a little time in the coalition-threatening showdown with her Bavarian CSU party allies over migration policy.

German Chancellor Angela Merkel gestures at a news conference with NATO Secretary-General Jens Stoltenberg in Berlin, June 15, 2018

They are due to discuss today whether to defy Merkel and unilaterally start rejecting migrants who have already registered in another EU state, but at the weekend its chairman Horst Seehofer pointed to a June 28/29 EU summit as a “crucial” moment in the saga.

Seehofer, who is also Merkel’s interior minister, urged other EU members to guarantee the protection of the bloc’s external borders, to fairly distribute people allowed to stay and quickly return those without that right.

EU capitals have been split over migration policy for years so it looks like a tall order for them to agree on such a shake-up in a matter of weeks. This time, the survival of Merkel’s government could depend on it.

We could collapse the government, and I can assure you I wake up at 2 a.m. in a cold sweat thinking about the problems we have put on our shoulders

The battle within Britain's own ruling Conservative Party over Brexit goes back to the upper house of parliament today. Lawmakers there likely to reject again PM Theresa May's Brexit blueprint and demand more say for parliament as a whole, setting the stage for a new and possibly decisive confrontation with pro-EU rebel lawmakers on the so-called "meaningful vote" issue on Wednesday.

In the meantime, a government plan unveiled in the weekend media to pump 20 billion pounds of cash into the NHS public health service thanks to a "Brexit dividend" has been greeted with widespread scepticism.

Even Conservative lawmakers have pointed out that current planning for Brexit would mean there is precious little dividend to be had - even before you take into account the negative impact that an exit from the EU is forecast to have on growth and hence tax revenues. If the announcement was timed to take the sting out of a possible government climb-down on the “meaningful vote” later this week, it looks to have failed.

European Commission Vice President Frans Timmermans is in Warsaw today to try and convince the government there to hold back from moves early next month which Brussels says will put judges under more political control.

There is little sign out of Warsaw of a readiness to relent: ahead of the meeting, Polish Prime Minister Mateusz Morawiecki has been criticising his country's Supreme Court as being stuffed with Communist-era judges.

This row is turning into a major test of the EU's ability to sanction member states who do not follow the rules underpinning the bloc - the independence of the judiciary being one of the EU's core values. It has warned that it could in theory strip Poland of its voting rights on EU matters but knows that any attempt to do so would be blocked by Hungary (itself heading for a clash with Brussels on similar issues).

A crew member hugs a migrant child aboard the Aquarius rescue ship before disembarking in the port of Valencia, Spain, June 17, 2018

MARKETS AT 0655 GMT

All last week’s central bank action has been replaced by fears of a full-blown trade war after the United States on Friday detailed $50 billion of Chinese imports to face 25 percent tariffs and Beijing reciprocated with $50 billion of U.S. imports it would sanction, suspending all previous trade agreements with U.S. President Trump’s administration.

This escalation of the trade war is dangerous for oil prices. Let’s hope cooler heads prevail, but I’m not overly optimistic

Together with G6 anger and likely retaliatory actions over indiscriminate U.S. tariffs on steel and aluminium, the impact of trade clouds on business confidence and activity becomes front and centre of global markets’ concerns once again.

The combination of Federal Reserve monetary tightening with the drag of a prospective trade war is already seeing the U.S. Treasury yield curve flattening again, with the 2-10-year maturity spectrum shrinking to 36 basis points first thing Monday – another post-2007 low. Nominal 10-year Treasury yield nudged down to 2.91 percent despite last week’s Fed rate rise and relative hawkishness about the future rate horizon.

While some equity sector rotation – away from heavily trade dependent multinationals, industrials and luxury goods makers toward technology and domestically focused small caps – is underway again, the overall S&P500 ended lower on Friday and Japan’s Nikkei and South Korea’s Kospi were down between 0.75-1.10 percent overnight.  Shanghai and HK markets were closed for a holiday.

The U.S. dollar was firmer across the board. The combination of trade worries and the Fed-fuelled higher dollar is proving toxic for emerging market assets at large and MSCI’s emerging market equity index fell to its lowest level of the year on Monday – down 13 percent from January’s peaks and some 4 percent year-to-date.

Emerging market currencies have been battered in recent weeks, forcing many central banks to reverse monetary easing cycles and push up interest rates steeply in defence of ailing exchange rates.  The main emerging currencies in this region – the Turkish lira, South African rand and Russian rouble - were relatively stable on Monday however. The main domestic focus of the week is Turkey’s presidential and parliamentary elections next weekend.

The other focus of the week is the OPEC summit in Vienna on Friday, where agreement on production increases is eyed. Brent crude dipped briefly below $73 per barrel after steep losses on Friday, with U.S. futures falling even more as crude imports were on China’s list of tariffs on U.S. goods.

Sterling was on the backfoot against the dollar too. The UK’s Brexit bill due to go back to parliament’s upper house, where it’s likely to rejected again and will set up confrontation between PM May and pro-EU rebels in her own ruling Conservative party.

European shares are set to add to Friday's losses with trade tensions, a potentially destabilising CSU party vote over a migration plan in Germany. Futures on main euro zone benchmarks were trading down 0.2-0.5 percent, putting the pan-regional STOXX 600 on track to erase the gains seen on Thursday when a dovish ECB pushed back expectations for an interest rate hike.

— 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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