November 26, 2018 / 8:41 AM / 16 days ago

Daily Briefing: Naval flashpoint ignites Crimea tensions

LONDON (Reuters) - The European Union and NATO are calling on Russia to restore freedom of passage via the Kerch Strait after its seizure of three Ukrainian naval ships off the coast of Crimea on Sunday, and urging both Moscow and Kiev to act with restraint.

Prime Minister Theresa May leaves after a news conference following an extraordinary EU leaders summit to finalise and formalise the Brexit agreement in Brussels, November 25, 2018

The three vessels in question are currently being held at the port of Kerch with no clarity about when and if they will be released. Ukraine’s parliament is set to on whether to implement martial law from around 1400 GMT. In the meantime, the rouble is weaker on heightened risk of Russia facing more Western sanctions.

"There is no Plan B. If anyone thinks in the United Kingdom that by voting No something better would come out of it, they are wrong"

As one UK headline put it this morning: "Now for the hard bit". British PM Theresa May must now devote herself to selling her Brexit deal to a sceptical UK parliament after securing agreement with the EU this weekend. With a vote likely to take place just before the next EU summit on Dec. 13-14, she has about two weeks to apply the carrots and sticks required to win a majority.

With up to 80 of her own parliamentarians currently seen rejecting it, the odds would seem stacked against her - at least on the first go around. Whether or not there would then be enough time - and political will in Europe - for her to get an amended accord, remains to be seen.

In the meantime, local UK media report that some of her ministers now see a temporary membership of the EFTA grouping as a possible "plan B" that would ensure Norway-style close economic links to the EU as a stopgap.

A possible breakthrough in the Rome-Brussels stand-off? Italy's government will meet this evening to discuss a potential reduction of its deficit goal, a government source said of a move that could open negotiations to avoid a disciplinary procedure against Italy. The discussion is around reducing next year's budget target to a more palatable 2.0-2.1 percent of gross domestic product from the current target of 2.4 percent.

MARKETS AT 0755 GMT

World markets have started a pivotal week on a positive note, with the weekend G20 summit in Argentina looming large amid some hopes of a breakthrough in the Sino-U.S. trade row.

But it was Italian government sovereign debt that stole the show first thing, with the 10-year yield spread over Germany narrowing more 10 basis points to below 300 bp for the first time in more than two weeks after weekend press reports indicated some wiggle room among Italy’s leaders over their controversial budget plans.

After the European Commission rejected details of the 2.4 percent deficit target for 2019 last week, Italian Deputy PM Salvini was quoted on Sunday as saying no one was stuck fast to the 2.4 percent number and that as long as it helped the economy grow, the deficit could be 2.2 percent or 2.6 percent. A source from coalition party 5-Star also said the government wanted to avoid a tug of war over the budget.

Euro/dollar was firmer early on Monday at about $1.1360 and European stock futures were about 0.5 percent higher, recovering ground after another disappointing business sentiment reading from the region on Friday and after another plunge in the oil price.

Sterling was a touch weaker against a generally firmer dollar and euro after European Union leaders on Sunday agreed to a Brexit plan thrashed out between the Brussels and London over the past 18 months, but which faces stiff opposition from within the UK parliament ahead of a critical vote early next month.

Wall St stock futures firmed up overnight after another negative session on Friday saw it record its lowest close in 6 months, more than 10 percent down from September’s peaks and back in ‘correction’ territory.

Heavy oil price losses than saw Brent crude plunge below $58 per barrel dragged energy stocks lower. Brent, hit by growing signs of crude oversupply on world markets as demand ebbs, clawed back some lost ground first thing Monday but has so far failed to get a foothold back above $60.

Asia’s major bourses were mostly flat to positive on Monday. Elsewhere Russia’s rouble has been hit by the falling oil price and signs of growing tension between Russia and Ukraine after the Russia seized three of the latter’s naval ships on Sunday – sparking street protests in Kiev.

Ukraine’s dollar-denominated bonds fell across the curve on Monday as Ukrainian President Petro Poroshenko said he would propose that parliament impose martial law while the U.N. Security Council will meet on the latest developments at the request of Moscow and Kiev.

— 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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