LONDON (Reuters) - Angela Merkel's quest for a deal on migration that will keep her conservative alliance together continues this week after an impromptu EU gathering on Sunday failed to produce results. The hard deadline to achieve something is later this week with a full European Union summit in Brussels.
It’s interesting that the lack of agreement at the weekend has nonetheless worked in favour of German bonds so far, stretching out the yield spread with Italian debt further. Despite the troubles at home, Bunds are clearly still seen as a safe haven, it would seem. Leaders of Merkel’s CDU and her Bavarian CSU allies are due to hold talks in Berlin this afternoon.
Relations between the British government and business leaders soured further over the weekend as one senior minister accused companies of issuing "completely inappropriate" threats to pull out of the country over Brexit and undermining PM Theresa May.
Whether that is true or not, no one can stop companies from developing contingency plans and that is what they are doing: a poll of 800 executives out this morning concluded that nearly half of big companies from the rest of the EU have already started to cut their investment in the UK, with German firms leading the way.
The survey, by law firm Baker & McKenzie, also found that three quarters of bosses wanted Brussels to make concessions to Britain to secure a better trading relationship after it leaves the EU in early 2019.
Despite rising trade tensions, below-target inflation and evidence that euro zone growth may be petering out, economists polled by Reuters still think the ECB will end its asset purchases by year-end as scheduled, with the chances of it extending them into next year consider low. A good two-thirds judge that the bank will start rate hikes in the third quarter of 2019.
MARKETS AT 0655 GMT
World markets enter the final week of the first half of 2018 on the defensive as trade war drums pound, with Asia stock markets as well as European and U.S. futures nudging lower. The latest salvo came overnight as the Wall St Journal reported that U.S. President Trump plans to bar many Chinese firms from investing in U.S. technology companies.
U.S. and European futures are down about 0.5 percent, with Shanghai, HK and Tokyo benchmark bourses down about 0.8 percent. The report offset weekend moves by the People’s Bank of China to loosen monetary policy, cutting the amount of funds some banks must keep in reserve by 50 basis points – effectively releasing more than $100 billion of additional liquidity amid fears of a trade-related economic slowdown there.
The divergence of monetary policy from the tightening U.S. Federal Reserve saw the yuan fall to a 5-1/2 month low against the dollar on Monday.
The trade tension also knocked back European stocks, which had been buoyed on Friday by above-forecast June business confidence readings – bringing the euro zone’s economic surprise index to its highest in more than two months.
However, Trump’s trade threats extended across the Atlantic again later on Friday, knocking auto stocks briefly when the President said the United States may impose a 20 percent tariff on imports of cars assembled in the European Union.
The overall impact of the mounting trade war has been to raise concerns about business activity, with 10-year U.S. Treasury yields falling below 2.87 percent overnight and the 2-10 year yield curve flattening to an 11-year low just above 34 basis points.
The retreat in yields was also helped by falling oil prices after OPEC and other major oil producers agreed to lift supply at the weekend, albeit by slight less than some had speculated. Brent crude was hovering just above $74 first thing Monday from a close of $75.55 late Friday.
Turkey’s President Erdogan clinched re-election victory and is now poised to tighten his grip on power, as well as monetary policy, as he secures an outright victory in the presidential race and his alliance is set for a majority in parliament, also ushering in a new era that will see the country become an executive presidency.
Markets reacted positively to the clear-cut outcome. The lira firmed 2.5 percent to levels last seen a couple of weeks ago, local benchmark bond yields came down and some dollar-bonds rose to three week highs. However, while welcoming clarity on the political situation, investors seem wary of the direction of policy, with Erdogan having promised pre-vote to keep a tighter rein on monetary policy.
— 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. —