June 20, 2019 / 7:41 AM / 5 months ago

Daily Briefing: Leaders pore over EU jobs jigsaw

LONDON (Reuters) - Things could run late tonight in Brussels, as European Union leaders tussle over everything from who runs the big EU institutions to the bloc’s action on climate change.

Workers adjust a European flag outside the EU Parliament ahead of the EU elections in Brussels, Belgium, May 22, 2019. REUTERS/Yves Herman

Emmanuel Macron continues to block Berlin’s choice to run the European Commission, the German conservative Manfred Weber, in a stand-off with knock-on implications for the other posts up for grabs.

One name being cited repeatedly for the Commission post is French conservative Michel Barnier, but the quid pro quo for that could be Berlin insisting that a German run the European Central Bank.

This of course is even before any of the other 25 capitals have their say.

Separately, Poland is leading resistance to a move at the summit to commit the region to being net carbon neutral by 2050.

Brexit does get a look-in - but only on Friday: leaders will simply restate that the existing withdrawal deal is not up for re-negotiation regardless of who the next UK premier is.

On that front, Boris Johnson consolidated his lead further last night in a third-round ballot which saw the elimination of the only candidate resolutely against a no-deal Brexit.

A further two votes today should narrow the field down to the two names that will then be put to the Conservative Party grass roots membership.

A YouGov poll released a few days ago suggests those members - more white, male, old and affluent than the population as a whole - are in gung-ho mood: it found a solid majority for pursuing Brexit even if that led to the break-up of the United Kingdom and significant damage to the economy.

All of which provides the political context for the Bank of England’s meeting on interest rates today.

It is expected to soldier on as the only major central bank eyeing future rate increases even as the others prepare to ease policy.

The BoE is due to announce its decision at 1100 GMT, with economists assuming for now that there will be a unanimous vote to hold rates at 0.75%.

On fundamentals alone, there are reasons why borrowing costs might need to rise soon - wages are growing at their fastest pace in a decade and public expectations for future price rises are up.

Yet the irony is that the BoE may be able to do let others do the work for it: if the ECB, Federal Reserve and others begin to cut rates again while it holds firm, sterling should rise and Britain’s monetary policy stance would automatically become tighter in relative terms.


The Fed delivered its thinly veiled message of monetary easing ahead, even if not quite as aggressively as the European Central Bank did on Tuesday, and the Bank of Japan has joined the club with a nod to possible further stimulus later this year.

It would be almost perverse in this environment if the Bank of England went against the global grain at its policy meeting later day and continued to insist the next move in UK interest rates was up - and so markets will watch closely for a shift in tone there.

Expectations that Norway’s central bank will raise rates today clearly leaves it out of step.

Either way, world stock markets have lapped up the G3 global central banking signals, with long-term government bond yields swooning to levels not seen for at least three years and record lows in Europe.

Even though the Fed was hardly unequivocal about the extent of future rate cuts, futures markets have now fully priced in at least a quarter-point cut by next month’s policy meeting and a total of 0.75 percentage points of easing this year.

Some banks, such as Morgan Stanley, expect it to deliver a 50-point rate cut to start with in July – twice the typical increment for Fed rate changes – and 10-year U.S. Treasury yields have plunged below 2% overnight to their lowest since 2016.

Perhaps worryingly for the Fed, the inversion of the yield curve from three months to 10 years has increased to almost 20 bps - although the two-to-10-year curve rose to 27bp.  

Global stocks are embracing the central bank dovishness, helped by fresh trade talks between the U.S. and China before the planned meeting between Presidents Donald Trump and Xi Jinping at the G20 summit next week.

Wall Street futures are up 0.5% overnight after indexes there closed higher on Wednesday, with European futures up a similar amount to their highest since last August.

Shanghai stocks surged more than 2% on the twin boosts from the trade talks and easing signals, with Hong Kong up almost 1% too. China’s offshore yuan jumped to its strongest against the dollar since May 13.

Tokyo and Seoul rose as well. MSCI’s all-country world index was up for the third day to its highest in more than a month, with its emerging-market equity component outperforming with gains of almost 1% and its emerging currency index up at its highest since April 24.

The Fed’s signals and the reaction of the rates markets to it has seen the dollar retreat across the board, with the DXY index down 0.3% and dollar/yen sliding to its lowest since the flash crash of Jan. 3.

Possibly frustrating for the ECB after its aggressive policy message on Tuesday, euro/dollar is higher and back to where it was before ECB President Mario Draghi’s dramatic Sintra speech on Tuesday.

European government bond yields continued to slide, with Germany 10-year Bund yields slipping back below minus 0.31 basis points.

In energy markets, Brent crude prices rose by more than $2 per barrel after a U.S. drone was shot down in the Gulf region – just as tensions between Washington and Tehran rise over recent attacks on oil tankers and Iran’s plan to resume uranium enrichment.

In the UK, sterling gained against the dollar but fell against the euro before the Bank of England meets.

Despite global trade and recession fears and the uncertainties surrounding Brexit, BoE officials have tried in recent weeks to insist that market pricing of future UK rate moves is wrong and that it’s more likely to raise rates than cut again over the next year.

Whether it will concede some ground on that in light of the positions of other central banks remains to be seen later today.

With the contest to choose a new UK prime minister unfinished but still favouring hard-line Brexit supporter Boris Johnson, it’s a packed day for UK economic news.

Aside from the BoE meeting, BoE chief Mark Carney and finance minister Philip Hammond deliver their annual address to the London financial community at the Mansion House tonight and UK May retail sales are also due for release.

The mood on the British high street darkened again after Dixons Carphone – Britain's biggest seller of electricals and mobile phones - warned of another big fall in profits.

Its stock fell 22% after the open.

Elsewhere, banks will remain in the spotlight as Deutsche Bank shares come under pressure after a New York Times report that U.S. authorities are investigating whether the bank complied with laws meant to stop money laundering and other crimes.

Its shares are down almost 2% in early dealings.

Credit Suisse shares are also falling after the Financial Times reported that its plan to over a Chinese brokerage is threatened by a legal battle between a Beijing-based conglomerate and one of China’s most prestigious universities.

Delivery Hero shares are up as much as 10% after the food delivery company raised its financial-year sales guidance.

The move is likely to lift Just Eat and Takeaway too.

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. 

Editing by Larry King

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