February 12, 2018 / 8:31 AM / 6 months ago

Daily Briefing: German SPD in disarray; UK aid sector under scrutiny

LONDON (Reuters) - Angela Merkel warned in an interview on Sunday that there would likely be new elections if the membership of the SPD party reject her proposed grand coalition with them.

Chancellor Angela Merkel receives Valentine's Day flowers from the Central Gardening Association at the Chancellery in Berlin, Germany, February 9, 2018. REUTERS/Axel Schmidt

On that score, all bets are off after the debacle surrounding former party leader Martin Schulz, who briefly accepted a ministerial post despite earlier promises never to serve in a Merkel government.

Schulz has since said he would not take up the post but the episode merely confirmed suspicions among party grassroots that the leadership were more interested in ministerial limos than left-wing principles.

At least one party faction is now actively campaigning for a “No” vote, results of which are due on March 4. That date, coincidentally, is when Italy holds its much-anticipated general election - a vote in which one leading pollster has noted only a wizard could predict the outcome.

British aid group Oxfam faces a crunch meeting with the UK government today over a sexual misconduct scandal allegedly involving senior officials.

Britain’s aid minister has said it will cut off funding to any organisation that does not comply with a new review into charities’ work overseas, describing reports of sexual exploitation in the sector as “utterly despicable”.

The meeting comes as some in the ruling conservative party are running a campaign to slash UK foreign aid, which they see as a waste of money - and notably to ditch a pledge made by the David Cameron government to ringfence at least 0.7 percent of GDP for international development.

MARKETS AT 0755 GMT

There appears to be some relief in world stock markets after last week’s stomach-churning ride, with Friday’s bounce of almost 1.5 percent on the S&P500 taking the edge off its worst week in more than two years.

But tensions remain high, with ViX volatility closing the week out just under 30 percent and 10-year U.S. Treasury yields testing 4-year highs around 2.90 percent early on Monday ahead of key week for U.S. and European inflation readings.

With Tokyo markets closed for a holiday, Asia bourses fed off that late rally on Wall St and the main indices in Shanghai, HK and Seoul all gained between 0.5 and 1.0 percent. S&P500 futures were up by a similar amount and the MSCI all country world index  was up 0.2 percent.  

The equity market and Treasury yield bounce took the tension out the dollar, which slipped across the board early on Monday.

Euro/dollar was at $1.2280 after an early test of 1.23 failed. Brent crude oil also recovered some ground to $63.40, after hitting its lowest levels in about two months on Friday.

The pullback in oil prices last week may help soothe markets increasingly anxious about U.S. inflation and an overheating economy stateside.

But with 10-year Treasury yields grinding up gradually toward 3.0 percent and the 2-10 year yield curve gap now at 77.80 basis points – the highest since October – the initial trigger for the equity market correction remains in place.

U.S. and European central bankers’ dismissal last week of the jump in market volatility will only encourage speculation that further monetary tightening is in the pipeline, barring much deeper losses and disruption feeding the real economy.

And even if tighter policy is delayed somehow, the long end of the bond markets are still inclined to price rising inflation over the longer term.

That’s why the big economic release of this week will be the January U.S. consumer price report on Wednesday. If consensus forecasts are correct, then an easing of the headline rate of inflation to 1.9 percent from 2.1 percent in December should help stabilize markets.

But there will be some tension until then, with UK and German inflation readings also due out during the week.

In tandem with U.S. Treasuries, euro zone bond yields headed back to multi-year highs on Monday too, with European Central Bank official Nowotny quoted at weekend saying the central bank’s bond buying programme does not need to be extended after September.

Editing by Toby Chopra

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