July 2, 2018 / 7:39 AM / 4 months ago

Daily Briefing: Merkel's coalition hangs by a thread

LONDON (Reuters) - Angela Merkel's German coalition is hanging by a thread as Interior Minister Horst Seehofer of her Bavarian CSU allies decides whether to quit the government or not.

FILE PHOTO: German Chancellor Angela Merkel talks to Interior Minister Horst Seehofer before the weekly cabinet meeting in Berlin, June 13, 2018

Seehofer late last night offered his resignation but was then persuaded by CSU colleagues to have one more go at pushing Merkel to come up with tougher immigration controls.

Why the CSU urged the rethink is not clear but this is a high-risk strategy for them too — if the coalition implodes, they lose influence in Berlin and could see a decades-old partnership with Merkel’s CDU consigned to history.

Today, party leaders of CDU and CSU will meet separately in Berlin, with another crunch meeting between Merkel and Seehofer pencilled in for the afternoon.

This week sees a continuation of the tug of war playing out inside British PM Theresa May’s cabinet over Brexit as her top ministers prepare to gather on Friday to discuss a white paper on the government’s position.

Officials have meanwhile come up with a third model for handling customs after Britain leaves the European Union, the BBC reports this morning: the two options already out there have found no consensus in May's cabinet and in any case have been rejected in Brussels. No details of the new plan, if there is one, have emerged so far.

Separately a new poll shows a record 75 percent of major British companies are now pessimistic about Brexit. Weak investment and waning expectations for sales marked Deloitte's latest quarterly survey of chief financial officers. The 75 percent figure was up from 68 percent in the previous survey published in April.

MARKETS AT 0655 GMT

The first trading day of the new month, quarter and half-year has failed to dispel trade war fears from world stock markets.

Shanghai’s bear market lurch continued, with losses of up to 3 percent overnight as firms weigh the imposition of some $34 billion of U.S. tariffs on Chinese goods later this week and as elements of the June series of Chinese business surveys showed worrying signs of deterioration.

The yuan also continued its decline to 6.6460 per dollar, after clocking its worst month on record in June with losses of more than 3 percent. Markets are assuming the Beijing authorities are allowing the yuan to weaken to help offset the effect of tariff rises and as monetary policy diverges from the U.S. Federal Reserve’s gradual tightening.

Reports late last week that U.S. President Donald Trump was considering withdrawing from the World Trade Organization have also unnerved investors despite subsequent attempts by White House officials to play that down. With June PMI business sentiment surveys released across the world today, markets will be closely monitoring for any sign of trade-related damage or disruption.

Wall St stocks closed mostly flat on Friday, with 10-year Treasury yields weaker overnight at 2.84 percent and the two to 10-year yield curve continuing to hover near 11-year lows of 31 basis points.

The mood remained sour in the rest of Asia, with benchmark equity indices in Japan and South Korea both down more than 2 percent too. HK was closed for a public holiday. S&P500 futures were down 0.6 percent, with European equivalents falling more than 1 percent.  

Friday’s tentative recovery in emerging market equities went into reverse again, with MSCI’s main emerging index down 0.7 percent so far today. Mexico’s peso slipped lower in line with other emerging markets after only a brief rally on the expected election of left-wing candidate Lopez Obrador as the country’s new President.

Long ahead in the polls, Lopez Obrador’s anti-corruption ticket was twinned with overtures to foreign investors that there would be no radical change to foreign ownership of debt repayment policies.

U.S. President Donald Trump and first lady Melania Trump walk from Marine One as they return to the White House, July 1, 2018

In Europe, concerns over the stability of German Chancellor Merkel’s coalition government continued amid reports her interior minister Horst Seehofer, leader of the CSU junior coalition ally, had offered his resignation in dissatisfaction with the deal on immigration negotiated at the weekend European Union summit.

The euro weakened initially after news of his rejection of the EU deal, but has recovered on the prospect of him resigning. Euro/dollar was last 0.25 percent lower compared with Friday’s close. Sterling was a fraction lower against the dollar as the UK cabinet prepares to meet later this week to finally agree on a common position on Brexit as talks with the EU appear to have run into sand.

— 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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