July 1, 2019 / 8:01 AM / 17 days ago

Daily Briefing: Worst avoided on trade at G20, EU clinches deals

LONDON (Reuters) - The outcome of this weekend’s G20 meeting in Osaka could have been worse, but the results could have been a whole lot better, too.

While an all-out row on trade was averted as the United States and China agreed to restart talks, the final communique was a lowest-common-denominator type of compromise - as was the language on climate change, which also repeated the now-familiar line about the United States disagreeing.

The European Union was busier, clinching a free trade deal with the South American Mercosur bloc that was two decades in the making, then following that over the weekend with a pact with Vietnam. Manufacturing PMI data around the region, German unemployment and new UK figures on consumer lending are among the read-outs today.

There is still no white smoke from the EU summit in Brussels aimed at agreeing the institutions’ top jobs over the next five years.

It appears a compromise backed by Angela Merkel that would have seen Dutch socialist Frans Timmermans replace Jean-Claude Juncker as the next European Commission president was vetoed by her conservative allies elsewhere, notably eastern Europe. If that turns out to be the case, it is a telling sign of Merkel's dwindling authority and the rising weight of the former communist countries within the bloc.

As talks stretch into breakfast and beyond, another angle to watch is what happens to the European Central Bank job, with suggestions that agreement on that might have to be postponed until next time.

Federal Reserve Vice Chairman Richard Clarida, ECB chief economist Philip Lane, PBOC Governor Yi Gang and ECB rate-setters Klaas Knot and Olli Rehn speak in Helsinki. Rehn is already out saying the ECB is ready to adjust all its tools to lift inflation.

MARKETS AT 0655 GMT

Much to the relief of world markets kicking off the second half of the year, the U.S.-China trade relationship has been rewound back two months.

A man walks past an electric screen showing Japan's Nikkei share average outside a brokerage in Tokyo, July 1, 2019. REUTERS/Issei Kato

U.S. concessions to hold off on fresh tariff increases and allow U.S. companies to deal with Chinese telecoms company Huawei once again, alongside unspecified Chinese commitments to purchase U.S. agriculture produce, allowed Presidents Donald Trump and Xi Jinping’s weekend meeting at the G20 summit to announce a resumption of trade talks.

While not unexpected, the truce in the trade war takes pressure off world manufacturers – who had been suffering again over the past month as tariff threats increased.

The degree of pressure was revealed today in both the official and private Chinese manufacturing surveys for June that both showed the sector contracting during the month and below forecasts.

Japanese and South Korean manufacturing PMI surveys also showed shrinkage during the month, missing forecasts to hit their lowest in three months or more. The relief at the agreement to resume talks dominated, however.

Both Shanghai and Tokyo benchmark stock indices jumped more than 2%, with U.S. and European futures up about 1% each. The Eurostoxx50 index rose to its highest since last August shortly after the open. Ten-year U.S. Treasury yields rose back above 2%.

With some of the more aggressive bets on U.S. monetary easing scaled back, the dollar rallied. Its DXY index gained 0.4% to its highest in about 10 days. Dollar/yen climbed back above 108 to close at 108.50 and euro/dollar slipped back toward $1.13. China’s offshore yuan surged to its strongest level since May 10 at one point, before easing back to settle at 6.848 per dollar.

Emerging-market currencies outperformed, with MSCI’s emerging-market currency index rising to its highest since April 18 and its emerging-market equity index climbing to its highest since May 7.

Turkey’s lira was one of the big gainers, rising more than 1% on Monday to some of its best levels since April after Turkish President Tayyip Erdogan said he had heard from Trump at the G20 there would be no sanctions over Turkey's purchase of Russian S-400 defence systems and that Turkey had been treated unfairly over the issue.

European oil prices sprang from overnight lows after news that OPEC and its allies look set to extend supply cuts at least until the end of 2019 as Iraq joined top producers Saudi Arabia and Russia in endorsing the policy.

In Europe, Sunday’s European Union summit again failed to agree the new heads of the European Commission and European Central Bank. Talks continue on Monday after early frontrunner for the Commission job, Dutch socialist Frans Timmermans, failed to get enough backing on Sunday.

Also on Sunday, Bank for International Settlements chief Agustin Carstens at the weekend urged top central banks to preserve their ammunition for more serious economic downturns rather than deplete it chasing higher growth. Fed Vice Chair Richard Clarida said in Helsinki Monday that Chairman Jerome Powell saw some room for more accommodative policy.

Traders were also keeping an eye on Swiss stocks after an equivalence agreement between the EU and Switzerland lapsed late last week, meaning Swiss stocks cannot now be traded on EU exchanges until the row over unifying a variety of Swiss-EU trade agreements is settled. Swiss stocks opened up 1% on the global rally, however.

In corporate news, chipmaker shares are seen up 2% to 3%, helped by the easing up on Huawei, as well as by a report in the Japanese press saying Applied Materials will buy semiconductor device maker Kokusai Electric for about $2.3 billion. Huawei rivals instead should come under pressure with shares in Ericsson and Nokia shares both expected to open lower.

Carmakers should also get a boost from the trade relief, along with other sectors sensitive to global growth and China, such as miners. Airbus is seen helped by reports that the U.S Department of Justice broadened its investigation into Boeing's 787 Dreamliner. One trader has called the stock up 1%.

Eyes were also on Aston Martin after its biggest investor said it was considering making a cash offer for another 3% stake in the luxury carmaker. Lafarge Holcim could also be in focus after a Bloomberg report said the cement company is looking into acquiring BASF's construction chemicals division.

Manufacturing PMI business surveys for June from around the world are due.

— 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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