June 4, 2018 / 7:28 AM / in 5 months

Daily Briefing: Merkel - steps towards Macron on EU?

LONDON (Reuters) - Germany’s Angela Merkel made a couple of important concessions on Europe in a newspaper interview at the weekend, notably backing the idea of a European rescue fund for countries suffering economic stress, and a modest investment budget for the eurozone club.

French President Emmanuel Macron and German Chancellor Angela Merkel wave after Macron was awarded Charlemagne Prize in Aachen, Germany May 10, 2018. REUTERS/Wolfgang Rattay

She has also stepped back from an EU attempt to impose national quotas for accepting immigrants into Europe, a victory of sorts for Poland and other countries that have long resisted such a plan.

This all looks like Merkel catching up with the reality of a Europe in which disillusioned voters are turning to anti-establishment or extreme parties to improve their lot; and where Warsaw and Budapest carry more weight than before.

Paris is happy that she has moved a step in the direction of Emmanuel Macron's ideas for revamping the eurozone but want her to go further in the weeks leading up to a summit set for the end of this month.

Today she meets ECB chief Mario Draghi in Berlin for a regular round of private talks.

New governments in Italy and Spain get down to their first full week of work today.

Aware that he must show he offers something different to what has gone before, Italy's new Labour Minister Luigi di Maio, leader of the anti-establishment 5-Star, has taken aim at the flagship labour reform of ex-premier Matteo Renzi.

The legislation, introduced in 2015, made it easier for large companies to fire people and offered fiscal incentives for companies that hired permanent workers on new, less-protected terms. However its results in creating new jobs are disputed, and di Maio said it has undermined job security; he has yet to reveal how he plans to shake things up.

Meanwhile in Madrid, Spain’s new PM Pedro Sanchez holds a meeting with Ukraine’s President Petro Poroshenko.

But his mind will soon turn to the ever-present challenge posed by Catalonia after nationalists regained control of the local government at the weekend and immediately pledged to seek independence for the wealthy region - something Sanchez opposes.

It is not clear whether he will be more open than his predecessor Mariano Rajoy to compromise but Catalonia looks as if it will remain a thorn in the side of Spain’s politics for months to come.

MARKETS AT 0655 GMT

Already, June seems brighter.

World stock markets rallied sharply on the coattails of Wall St’s post-payrolls gains on Friday, with some easing of political tensions in Italy and Spain and signs of renewed merger activity between European banks helping offset anxiety about global trade relations.

The S&P500 added more than 1 percent on Friday, with the giant technology and internet stocks leading the way, after news of a bigger rise in U.S. hiring last month than forecast and drop in the unemployment rate there to an 18-year low of 3.8 percent.

The Vix gauge of implied volatility slipped to as low as 13.46 percent.

The upbeat mood washed across Asia early on Monday, with Japan’s Nikkei and Hong Kong’s Hang Seng both rising more than 1 percent too, with Shanghai and Seoul also advancing.

Much of the renewed optimism has come from relief that Italy will not be heading back to snap elections again and positive signals from the incoming coalition that euro exit is nowhere on their agenda.

With opinion polls in Italy showing up to 70 percent in favour of the single currency, new finance ministers Tria said over the weekend that no political force in Italy wants to exit euro.

This has helped soothe many nerves in the markets, where concerns about that a free-spending new government would be loaded with anti-euro voices that may fight a new election on the issue spooked investors in Italian government bonds early last week.

Similarly, the ousting of Spanish PM Rajoy in a confidence vote on Friday over a corruption scandal has seen Socialist Party leader Sanchez take over the reins of power relatively smoothly – even though the return of Catalan separatists to power in that region’s weekend elections may set up a tense introduction for the new premier.

Reports on Monday that Italian bank Unicredit and France’s Societe Generale were in fresh merger talks also helped offset last week’s gloom over Deutsche Bank’s ailing U.S. operations.

Also lifting the gloom in Europe were weekend statements from German Chancellor Merkel that Germany was in favour of a moves toward a European Monetary Fund to resolve any issues of euro zone sovereign debt sustainability – one of the key euro zone reforms put forward by French President Macron.

International trade tensions remain high after U.S. President Donald Trump imposed steel and aluminium tariffs on China, Japan and its major Western allies – a move that led to a fractious meeting of G7 finance chiefs in Canada at the weekend.

The six others condemned the U.S. move and urged U.S. Treasury Secretary Mnuchin to lobby Trump to reconsider at the leaders’ summit in Quebec next week.

Whether Trump even attends that summit remains to be seen however.

U.S. Treasury yields nudged higher after Friday’s payrolls, meantime, as a Federal Reserve interest rate rise next week is now seen as baked in.

The dollar was a touch weaker, with euro/dollar nudging up just shy of $1.17.

Investors in Turkey were on edge after Moody’s credit rating agency put the country on credit watch and after data showed inflation quickened above forecast to 12.15 percent last month in the wake of the recent currency weakness.

The lira weakens 0.3 percent to its lowest in a week in a third straight day in the red, underperforming emerging currencies which are broadly treading water.

Meanwhile Ankara policy makers out again over the weekend to soothe investors’ nerves, with Deputy Prime Minister Mehmet Simsek saying on Sunday that monetary policy concerns had been largely addressed with foreign investors during last week’s trip to London and fund flows had started to return since.

Despite these attempts, there has been no satisfactory answer to the concern that President Erdogan will take greater control of economic and monetary policy after this month’s election.

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. 

Editing by Matthew Mpoke Bigg

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