January 7, 2019 / 8:37 AM / 16 days ago

Daily Briefing: Parliament braces for new Brexit clash

LONDON (Reuters) - The UK parliament reopens for business today after the Christmas break with no obvious sign it can break the deadlock over Brexit.

A briefing of lorry drivers and personnel is seen in front of the convoy of lorries before a test drive to the Port of Dover during a trial of how roads will cope in case of a 'no-deal' Brexit, January 7, 2019

Contrary to suggestions that Prime Minister Theresa May will further delay the crunch vote on her compromise deal with Brussels, next Tuesday is now being mooted as the date for the showdown. The opposition Labour Party is sticking to its line that it would only support a second referendum if May's deal is rejected and she then refuses to submit to a general election.

Meanwhile, alarm bells from industry are getting louder: commenting on new data showing British new car sales last year fell at their fastest rate since the global financial crisis, the auto sector trade body is calling Brexit an "existential threat".

Bad news for the German economy this morning as industrial orders fell more than expected in November. This is the latest evidence that international trade frictions, Brexit-linked risks and weaker growth in emerging markets are putting the brakes on a nine-year upswing in Europe's economic powerhouse. Contracts for goods "Made in Germany" fell by 1 percent - substantially more than the 0.4 percent slip economists had forecast.

A separate survey released on Friday showed a drop in both new orders and business confidence had slowed growth in Germany’s services sector to a 27-month low in December. Separately, union Verdi is calling on security staff at Berlin’s Schoenefeld and Tegel airports to go on strike from 5 a.m. to put pressure on management in wage talks later this month.

MARKETS AT 0755 GMT

World markets were rescued from their new year slide on Friday by a four-way boost: above-forecast U.S. job creation last month, dovish messages from Federal Reserve Chair Jerome Powell, a 100-basis-point cut in China’s bank reserve requirement ratios and news of a resumption today in Beijing of Sino-U.S. trade talks.

The boost to stock markets saw them recapture all the year’s losses and push into positive territory for 2019 so far, with Wall Street’s main indices up more than 3 percent by the close on Friday.

After gains of more than 2 percent in Shanghai and Hong Kong on Friday before the U.S. jobs report and Powell’s comments, both markets added almost 1 percent on Monday. Japan’s Nikkei reversed Friday’s plunge and gained 2.4 percent. Seoul’s Kospi rose 1.3 percent.

Ten-year U.S. Treasury yields have gained more than 10 basis points from Friday’s low, although at 2.66 percent remain below the close on New Year’s Eve. The DXY dollar index is lower, with dollar/yen pushing towards 108 after last week’s unnerving flash crash.

Euro/dollar pushed back above $1.14 despite another mixed round of German economic reports — a larger-than-forecast drop in industrial orders in November but surprisingly strong jump in retail sales. U.S. and European stock futures were both higher in early trading.

Emerging markets were the biggest gainers from the improvement in risk appetite – MSCI’s emerging equities index rose to its highest since mid-December and its emerging currency index surged to its highest since July. China’s offshore yuan reached its highest since November, with South Africa’s rand rising to its highest in a month. Brent crude oil prices pushed higher above $58.

The big debate now is whether market fears of a looming U.S. recession over the next 12 to 18 months were overdone, especially if there is some easing of the tariff war between Washington and Beijing, and whether the Fed will be more responsive to signs of a slowing economy that it and many market participants had been outlining only a few weeks back.

Not only did Powell indicated that the Fed would be willing to alter its policy trajectory if warranted, but both he and New York Fed chief John Williams said the Fed could also rethink its balance sheet reduction if necessary.

The well-flagged Chinese monetary easing, meantime, is not expected to be the last. Bank of America Merrill Lynch’s report on Friday that its gauge of market positioning had become excessively bearish was supported by events later in the day.

The burden of proof now falls on the incoming economic numbers and the upcoming earnings season to decide the next direction, although a lack of progress in the trade talks and the continued shutdown of the U.S. Federal government are likely to sustain the extreme volatility of the past couple of weeks.

Elsewhere, French sovereign debt spreads over Germany held steady despite another round of violent protests on French city streets at the weekend. Sterling was stronger as the UK parliament prepared for the postponed vote on UK PM May's Brexit deal this month.

The latest opinion polls show the UK public would now vote to remain in the European Union by a 54-46 percent margin and a majority also now backs a new referendum on the deal.

— 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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