February 11, 2019 / 8:34 AM / 5 months ago

Daily Briefing: Washington rediscovers central Europe

LONDON (Reuters) - In the 2000s, Washington was sending top diplomats to central Europe on almost a monthly basis as it avidly promoted the region’s aspirations to mould itself into European Union and NATO structures after the collapse of communism. But a sense of “job done” took over after NATO’s expansion eastwards was completed and the United States turned its foreign policy attention to Asia.

FILE PHOTO: U.S. President Donald Trump calls on his Secretary of State Mike Pompeo to speak during a presidential memorandum signing in the Oval Office, February 7, 2019

U.S. Secretary of State Mike Pompeo's trip to Hungary, Slovakia and Poland starting today is an attempt to redress what he acknowledges as a decade of neglect that has, among other things, allowed more Chinese and Russian influence into the region.

Some concrete projects will be discussed - Hungary’s call for help in diversifying away from Russian energy via a gas field in the Black Sea and some defence accords, including with Slovakia which is looking to buy F-16 fighters.

Britain's defence minister, meanwhile, sets out a call for the country to be a "hard power" player after Brexit, always ready to defend its interests with military force when needed. Williamson will outline plans to send its new aircraft carrier to the Pacific, invest in offensive cyber capabilities and develop more military "lethality" than in recent years.

Government critics - not least in the army itself - will be sceptical of such ambitions given the shrinking size of the armed forces and the existing multi-billion-pound funding gap for future projects.

Separately, UK negotiators return to Brussels to see if there is any leeway to be had on the Irish backstop stalemate. By indicating that parliament will be given another chance to review options at the end of this month, Theresa May has again bought herself a bit more time - or, depending on your viewpoint, is continuing to deliberately run down the clock.

Euro zone finance ministers meeting later today are set to choose Ireland's Philip Lane as the successor to the European Central Bank's chief economist, Peter Praet, whose term ends at the end of May.

As the sole candidate, the 49-year-old Harvard-educated economist Lane is a shoo-in even before his impressive list of academic honours, articles, essays and teaching roles around the world are taken into account.

He is set to become Ireland’s first representative on the ECB’s six-member executive board and his appointment is an integral part of the ECB re-shuffle which includes the replacement of its president, Mario Draghi, in October.

MARKETS AT 0755 GMT

Chinese markets returned from their Lunar New Year break with hopes today’s resumption of Sino-U.S. trade talks in Beijing will bear some fruit. Many now assume the March 1 deadline will be extended even if a major breakthrough is not forthcoming.

Wishful thinking or not, Shanghai stocks return with gains of more than 1 percent, with Hong Kong up 0.5 percent. South Korea’s Kospi underperformed, ending only marginally in the black.

There was less optimism on this week’s two other major deadlines. Talks on averting another U.S. government shutdown next week broke down over the weekend, with the White House and Democrat leaders in Congress locking horns over President Donald Trump’s insistence on funding for a border wall with Mexico.

There was little progress in UK PM Theresa May’s attempt to present to her parliament by Thursday an amended Brexit withdrawal agreement that could gain a majority. That left the whole Brexit process in limbo despite signs of agreement on some issues between May and the opposition Labour party.

Wall Street stock futures were steady to lower first thing, with growing anxiety about future earnings downgrades emerging amid the current corporate earnings season.

Expectations for aggregate annual S&P500 profits in the first quarter are now negative to the tune of 1 percent – the first contraction since 2016 and reinforcing some forecasts for a U.S. earnings recession this year even if the wider economy manages to skirt one.

Even though markets have stabilised through January on the assumption that the Federal Reserve has paused its interest rate rise campaign, but the Fed continues to reduce its balance sheet by $50 billion a month and is tightening liquidity in the market in the process.

The dollar’s DXY index hit a near six-week high earlier, dollar/yen popped briefly back above 110, with euro/dollar touching its lowest in more than 2 weeks. MSCI’s emerging markets currency index fell for the seventh straight trading day, its longest losing streak in 16 months.

European stocks took heart from the positive return of Shanghai and futures are pointing higher. But the threat of recession is very real in Europe, already in full swing in Italy and in German industry in the final quarter of last year.

Benchmark German bund yields held below 10 basis points after dropping last week. Many are now focused on the European Central Bank resuming some liquidity support for the economy via targeting cheap loans, or TLTROs.

Prime Minister Theresa May tries to throw a ball for a dog as she leaves a church near High Wycombe, February 10, 2019

European earnings are on track for their worst quarter since 2014, although valuations are already much cheaper than their U.S. counterparts, and there’s a positive skew on incoming updates beating forecasts.

Deal-making was also in focus on Monday, with Euronext upping its offer for Oslo Bors and intensifying a bid battle with Nasdaq for the Norwegian stock market operator. Sterling was steady amid the Brexit impasse, with traders looking at UK fourth-quarter GDP numbers out later in the morning.

— 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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