July 18, 2019 / 7:32 AM / 4 months ago

Daily Briefing: As clock ticks, what price no-deal Brexit?

LONDON (Reuters) - Opponents of a hard Brexit in parliament may try again to assert their influence today by backing a bill that would require the assembly to get regular updates on the situation in Northern Ireland - a device whose main goal is to stop any future PM from suspending parliament to usher in a no-deal Brexit.

If the vote does go ahead today, the big question is whether any cabinet members - among them finance minister Philip Hammond - will join that effort.

Before that, the UK's official forecasting body is due to give a series of predictions on the UK economy, including what would happen to it in the event of a no-deal Brexit: according to the Times, the body will conclude that such an outcome would take a massive three percent chunk out of GDP.

G7 finance chiefs wrap up their meeting in Chantilly with closing news conferences today. The main take-away of the meeting so far has been the almost uniformly hostile front shown to Facebook's Libra currency plan, with objections ranging from data security to money-laundering concerns.

G7 finance ministers and central bank governors pose for a family photo during the meeting in Chantilly, France, July 17, 2019. REUTERS/Pascal Rossignol

The deeper issue is a growing alarm that the reach of big tech companies is encroaching on areas belonging to elected governments, like the hitherto sovereign task of issuing currency. It’s still not clear what kind of regulatory clampdown Libra and other crypto currency variants might expect - and whether such moves will be so punitive as to deter such projects in the first place.

The next episode in Spain's attempts to form a government happens later today as the far-left Podemos party announces results of a poll of its members on whether to form some kind of alliance with Socialist Party leader Pedro Sanchez.

They were asked to decide between an all-out coalition deal or a looser pact that would include just a few low-ranking Podemos-backed officials. Ironically, the first option would make it harder for Sanchez to become PM unless he does a U-turn and allows senior Podemos figures to have substantial positions in his cabinet.

MARKETS AT 0655 GMT

As competing factors jostle for attention, the U.S. earnings season has muscled into the fray and knocked world markets off their perch.

Amid anxiety over the big banks’ net interest rate income and margins, rail freight giant CSX warned of the impact of the ongoing U.S.-China trade war as it reported below forecast Q2s – sending its stock price down more than 10 percent in the biggest one-day drop in more than 10 years.

Then, after the bell, video streaming firm Netflix jangled tech investor nerves by reporting it lost U.S. subscribers for the first time in eight years and missed overseas targets for new customers – sending its shares down more than 10%, too, in aftermarket trade.

The European Union launching an antitrust investigation into Amazon didn’t help the mood. And on top of the gloom from the corporate world, the macro news over the past 24 hours has been poor too.

U.S. housing starts and permits missed forecasts for June, Japan’s exports also plunged a bigger-than-expected 6.7% in the year through June and Britain’s independent budget watchdog forecast a UK recession next year and a loss of three percentage points of GDP if there’s a ‘no deal’ Brexit.

U.S. stock indices were all in the red overnight, with the S&P500 clocking its biggest one-day loss in a month. The darkening skies has been reflected in rising expectations of a 50 basis point interest rate cut by the Fed later this month, with futures markets now putting a 1-in-3 chance of a move of that size - with a quarter-point cut fully baked in.

Ten-year U.S. Treasury yields slipped back toward 2.03%, with the yield curve inversion between 3 months and 10 years deepening again to 8 basis points. The dollar took the heat as a result.

Dollar/yen fell back to its lowest in three weeks, aggravating an outsize 2% drop in Japan’s Nikkei index earlier – its biggest drop in 4 months. The dollar’s DXY index recoiled too and euro/dollar nudged up to $1.1240.

The dollar’s retreat was compounded by a report from the International Monetary Fund that estimated the dollar was overvalued by between 6% and 12% - even though it saw the euro, yen and yuan broadly in line with fundamentals.

In a readout ahead of today’s G7 finance chiefs meeting in France, the IMF also warned about the growing impact on the world economy of trade protectionism and the simmering US-China trade wars.

Nikkei losses aside, it was a downbeat trading day across Asia in the slipstream of Wall St losses. Shanghai stocks dropped 0.75%, HK was down 0.7% and Seoul’s Kospi slightly outperformed with losses of 0.3% after South Korea’s central bank unexpectedly cut interest rates for the first time in three years as it shaved this year’s growth forecast to its lowest in a decade.

U.S. and European stock futures were down between 0.3% and 0.6%, with Germany’s DAX down about 1% after tech bellwether SAP reported poor earnings. Brent crude oil prices steadied after slipping to a two-week low just above $63 on Wednesday. Top of the U.S. earnings diary later are Morgan Stanley and Honeywell – with the European season now in full flow as well.

Sterling regained a foothold back above $1.24 against an easier dollar, with the PM leadership hustings still centre stage amid hard Brexit fears and UK June retail sales numbers out later today. Euro zone government bond yields dipped further towards record lows. Euro zone money markets are still pricing in a nearly 50% chance of an ECB rate cut for next week, even though many economists doubt a move so soon.

In emerging markets, the Turkish lira was steady, shrugging off the U.S. decision to remove Ankara from the F-35 fighter jet programme after it began receiving delivery of the Russian S-400 missile defence system last week. South Africa’s rand was also a little firmer even as SA’s Reserve Bank was poised to cut interest rates by a quarter point later on Thursday.

On the European corporate news front, Germany equity futures are down as much as 1%, with SAP shares falling almost 7% in early Frankfurt trade after Europe's most valuable tech company's quarterly revenue and adjusted operating profit came in below expectations. It's dragging other software stocks Software with it. Weaker oil prices are likely to pressure London's FTSE.

Aside from Novartis, which lifted its guidance, investors don't appear to be impressed with earnings this morning, punishing Richemont and Givaudan. A drop in Swiss watch exports is also taking the shine off the luxury sector which has had a stellar run following Burberry and Swatch results earlier this week.

Swiss industrial equipment maker Bobst shares are down as much at 9% in early deals after its profit warning, while Swedish car maker Volvo reported better-than-expected quarterly operating profits but launched a cost-cutting plan as pricing pressure and the impact of tariffs from the Sino-U.S. trade war dent profitability.

British online fashion retailer ASOS has warned on profit for the third time in eight months, blaming operational issues as it overhauls its warehouses in the United States and Europe. Its shares are seen down as much as 20%.

— 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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