LONDON (Reuters) - Her main appearance will be a quick one over coffee after tonight's dinner, but British PM Theresa May's intervention at today's EU summit is what most officials will be looking out for.
As widely flagged, the issue is how far she is prepared to go in guaranteeing the rights of EU residents in the UK once Britain leaves the bloc. Aside from being important in itself, the generosity or otherwise of her proposal could also help set the tone for future talks on other matters.
The other burning Brexit issue today is whether May has effectively given the Scottish parliament a veto over the terms of Brexit by acknowledging that Holyrood would have to back any future deal. If true, this one could open up a Pandora’s Box of new uncertainties.
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With markets unnerved by the evaporation of inflation this year, the lack of a pickup in wage growth and weeks of disappointing economic activity readings, the deepening slide in the oil price is only amplifying those concerns and will make central bank decision making even tougher.
Although it steadied just under $45 early on Thursday, Brent crude fell to a new 7-month low of $44.35 overnight – almost 21 percent down from April’s peaks and clocking year-on-year losses of more than 10 percent.
Inflation gauges and markets across the board – the flattening U.S. yield curve, index-linked debt, five-year, five-year forwards – are all responding – putting up a challenge to Federal Reserve officials determined to raise interest rates one more time in 2017.
While futures pricing less than a 40 percent chance of that happening would typically be a positive signal for world equity markets, there are gnawing concerns the inflation picture is reflecting a dearth of final demand and could be a red flag for growth going forward.
The S&P500 ended marginally in the red again overnight, with Asia bourses more mixed. Shanghai and Tokyo closed lower, though HK and Seoul gained. European stocks, on the other hand, are set to fall for the third session in a row. The dollar index and Treasury yields were a shade lower too. Euro zone bond yields are bumping along near multi-month lows with long-term euro zone inflation expectations as low as 1.5% for the first time this year.
For the Bank of England, and any BoE watchers and sterling traders, the situation is doubly perplexed as it grapples with a sterling-fuelled inflation overshoot despite signs of fresh underlying weakness in living standards and economic confidence.
The BoE’s chief economist Haldane shocked the pound higher on Wednesday by countering the view of his boss Mark Carney and signalling he may vote for an interest rate rise by the end of the year.
BoE policymakers are now clearly split on what to do and every speech from these officials over the coming week will be highly market sensitive.
UK PM May heads to the EU summit on Thursday and present the government’s plans for Brexit as she tries to hold a minority government together at home.
The pound was firm just under $1.27 in early trading.
Editing by Alison Williams