January 22, 2018 / 8:52 AM / a year ago

Daily Briefing: Reprieve for Merkel as SPD say 'Yes'

LONDON (Reuters) - At last, Angela Merkel's German conservatives get down to the formal (and final) negotiations today on a grand coalition with the Social Democrats, who narrowly voted to go ahead with her at the weekend.

German Chancellor Angela Merkel arrives for a statement at the CDU headquarters in Berlin, January 21, 2017, after Germany's Social Democrats voted to begin formal coalition talks with Merkel's conservatives. REUTERS/Axel Schmidt

Although this brings the prospect of a German government in place by March, the whole thing can still be torpedoed by the some 440,000 SPD members who have to endorse the deal at the end. The mood within the SPD is far from jubilant given their dismal poll ratings, and there is still the possibility they will prefer going into opposition rather than sharing power with Merkel again.

Thus there is pressure on SPD leaders to improve the draft coalition deal, notably on domestic welfare policy. Merkel is, so far, holding on to power; but her tenure has rarely seemed more fragile and she looks far from the pre-eminent leader of the West some were calling her only months ago.

Finance ministers from the euro area countries meet this afternoon with Greece high up on the agenda. The plan is to discuss the progress of reforms delivered by Athens and possibly agree to release the next tranche of loans from the bailout fund.

They will also get the ball rolling on the selection of the next set of officials to run the European Central Bank. The first appointee - the vice president - could be made within weeks. That in turn will offer clues on the heavily political process that will result finally in the choice of successor to ECB chief Mario Draghi, who steps down in 2019.

U.S. Secretary of State Rex Tillerson will be holding talks on Syria and Iran when he arrives in London today, but the trip has been somewhat overshadowed by the row over the U.S. embassy triggered by his boss. Donald Trump cancelled his own trip to London to open the embassy, arguing he did not want to endorse a bad deal agreed by the Obama administration to sell the old one for “peanuts.” Tillerson hopes to visit the new building, but it is unclear whether he will perform the ribbon-cutting.

MARKETS

The U.S. government shutdown has had remarkably little financial market impact so far, not unlike the myriad political surprises around the world over the past 18 months. Despite the looming outage of day-to-day government functions later on Monday due to congressional stalemate over extending the debt ceiling, Wall Street stocks closed higher and the S&P 500 and Nasdaq set another series of record closing highs.

Long-term U.S. debt yields, which have fallen in previous such shutdowns on the threat to economic activity and confidence, also pushed higher on Friday and early Monday and 10-year U.S. Treasury yields hit a 3 1/2-year high of 2.6720 percent earlier. The dollar index and the euro/dollar exchange rate were little changed from Friday’s levels. The main assumption appears to be that this will get resolved relatively quickly, as with previous such logjams in 2013 and in the mid 1990s.

The U.S. Senate is due to vote again at 1700GMT on Monday on a stopgap extension of Federal funding to Feb 8.  U.S. stock futures are down only about 0.15 percent first thing on Monday. Asia bourses are mostly in the black for the session, with only South Korea's Kospi bucking the trend. MSCI's all-country world index set another record high on Monday meantime.

European markets are also set for gains at the open, encouraged by news that Germany’s opposition SPD party voted to enter formal coalition talks with Chancellor Angela Merkel’s conservatives and Spain and Greece’s sovereign debt was upgraded late Friday. Spain’s 10-year bond yield fell to a five-week low in early Monday trade, squeezing the gap over benchmark German peers to its tightest in almost three years after Fitch Ratings upgraded Spain by one notch.

Investors betting on a pick of M&A deals in the pharma sector will likely be emboldened by news that French healthcare group Sanofi has agreed to buy U.S. peer Bioverativ in a $11.6 billion transaction. 

South Africa's rand led emerging market currencies, firming almost 1 percent to new 2 1/2-year peaks. Leaders of the ruling ANC party met on Saturday to outline the party’s programme for the coming year amid reports that its executive plans to force President Jacob Zuma to quit. Zuma’s presidency has been hit by corruption allegations.

But the Turkish lira remained under pressure, down 0.4 percent against the dollar, after Turkey launched military operations with rebel allies at the weekend against a U.S.-backed Kurdish militia in Syria's Afrin region. Turkey’s ties with the United States are already deeply strained and the dispute over Syria has weighed on the lira.

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