June 10, 2019 / 8:05 AM / 15 days ago

Daily Briefing: Money and drugs - May succession race heats up

LONDON (Reuters) - The race to succeed Theresa May as head of the Conservative Party and prime minister gathered pace at the weekend.

Former British Foreign Secretary Boris Johnson, who is running to succeed Theresa May as Prime Minister, leaves his home in London, June 10, 2019. REUTERS/Hannah McKay

Front-runner Boris Johnson promised tax cuts for high earners and threatened not to pay Britain's dues on leaving the EU - something France declared was tantamount to a debt default.

Environment Secretary Michael Gove appears on BBC TV's The Andrew Marr Show in London, June 9, 2019

Other contenders rushed to confess past dalliances with Class A drugs, no doubt spurred on by fears that such exploits would be subject to media leaks by rivals anyhow. All of which suggests the next few weeks will not be a demonstration of politics in moderation.

Party bosses will formally announce those candidates nominated for the contest this evening.

Italian Prime Minister Giuseppe Conte is due to meet the leaders of his two coalition parties, Matteo Salvini and Luigi Di Maio, to discuss the future direction of the government after months of political infighting. On the table will be a possible cabinet reshuffle and Italy's response in the growing stand-off with Brussels over Italy's debt mountain.

One of Europe’s highest-profile foreign policy achievements was its promotion of the 2015 deal between Iran and major powers to drop sanctions against Tehran in return for limitations imposed on its nuclear programme.

That started unravelling when Donald Trump announced last May that the United States was pulling out of the deal. Germany's foreign minister is due to meet Iranian President Hassan Rouhani in Tehran today as part of a concerted European effort to salvage the pact.

MARKETS AT 0655 GMT

World markets caught a Mexican wave first thing on Monday, after U.S. and Mexican negotiators reached a deal late Friday and averted a series of threatened U.S. tariff rises due to an alleged lack of migration curbs.

Together with pumped-up expectations of U.S. interest-rate cuts over the next couple of months – encouraged by news on Friday of U.S. jobs growth last month at less than half consensus forecasts – global equity markets continued their rally from late last week.

U.S. and European stock futures were about 0.4% higher first thing, with the Mexican deal seen as one step in repairing trade rows that economists fear could tip the U.S. and global economies into recession in 2020. Mexico’s peso has surged more than 2%.

Although sketchy on details oabout exactly what Mexico promised to prompt U.S. President Trump to drop his planned series of 5% tariff rises, the deal showed Washington was willing compromise and raised out hopes that a similar meeting of minds between Washington and Beijing could still be possible by the G20 summit later this month.

A notice from U.S. officials granting Chinese exporters two more weeks to get their products to the United States before raising tariffs on those items supported those hopes, as has speculation that Trump will eventually pull back from his trade wars to avoid a full-blown domestic recession in his re-election year.

Probably reflecting a degree of Chinese frontloading of exports to beat those impending tariff rises, Chinese exports unexpectedly rose more than 1 percent in May, although weakness in the domestic economy was underlined by a 8.5% drop in imports than was more than twice the decline expected.

However, the optimism surrounding trade détente and U.S. monetary easing were enough to lift Shanghai stocks 0.6% and Hong Kong more than 2%. Japan’s Nikkei rose more than 1%, with first-quarter Japanese GDP revised a touch higher, to 2.2%.

Seoul’s Kospi gained more than 1%, too, with MSCI’s all-country index of world stocks up for the sixth straight day – its longest winning streak since mid-March. MSCI’s emerging-market equity index was up almost 1% to its highest in about three weeks.

China’s offshore yuan continued to weaken after Friday’s drop to near seven-month lows on reports Beijing authorities were indifferent to the currency holding above 7.0 per dollar, the level many had assumed was a firm floor. The offshore yuan was last trading at 6.9491.  MSCI’s emerging-market currency index was lower as a result.

Elsewhere, the dollar rebounded from Friday’s post-payrolls lows, with dollar/yen at the highest in 10 days and euro/dollar a touch lower just above $1.13. Ten-year U.S. Treasury yields were higher at 2.1350%, with the inverted yield curve between three months and 10 years less negative at minus 14 basis points.

Ten-year German bund yields were also higher at minus 24bp, up from a record low of minus 26bp after last week’s dovish European Central Bank meeting.

With many European centres closed for a holiday on Monday, Italian sovereign debt spreads over Germany tightened to their lowest in more than a month as Italy’s PM Giuseppe Conte warned ruling coalition parties to resolve their differences, promising to lead talk with the European Union over breached budget rules and downplaying proposals for issuing controversial government IOUs, or “mini-BOTs”.

Brent crude oil prices were higher on the trade optimism and reports of a growing consensus for extending production cuts by oil-exporting nations.

In corporate news, dealmaking is making headlines. Renault and Fiat remain in the spotlight after Reuters reported the carmakers are looking for ways to resuscitate their collapsed merger plan and secure the approval of the French carmaker's alliance partner, Nissan.

Eyes are also on aerospace and defence companies after news on Sunday that United Technologies agreed to combine its aerospace business with U.S. contractor Raytheon, in what would be the sector's biggest-ever merger and is likely to reshape the competitive landscape of the aviation and defense procurement sector.

One dealer called BAE and Airbus up 1% to 2% on the news. United Technologies provides primarily commercial plane makers with electronics, communications and other equipment; Raytheon mainly supplies the U.S. government with military aircraft and missile equipment.

In other dealmaking, Thomas Cook may get a boost from a report that Hong Kong's Fosun Tourism is in talks to buy its tour business as the British group faces breakup after issuing three profit warnings in the past year.

— 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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