September 20, 2018 / 8:08 AM / 8 months ago

Daily Briefing: Brexit - Thin gruel at Salzburg dinner

LONDON (Reuters) - As expected, European Union leaders listened politely to British PM Theresa May’s call over dinner for them to improve their Brexit offer, and then moved on to other matters.

Britain's Prime Minister Theresa May is welcomed by Austrian Chancellor Sebastian Kurz as she arrives for the informal meeting of European Union leaders ahead of the EU summit, in Salzburg, September 19, 2018

While British officials thought they detected signals of a readiness to compromise, May's counterparts at the Salzburg summit were pretty blunt about the lack of progress. Today, they will discuss her Brexit proposals again over lunch - this time without her. May will get a separate briefing on their thoughts afterwards.

Trade officials are due to meet in Geneva today to discuss a revamp of the World Trade Organisation amid threats from President Donald Trump to pull the United States out of the body.

Business at the WTO has been held up by Washington’s decision to block appointments to its dispute settlement chamber, with the EU this week describing the current stand-off as the WTO’s “deepest crisis ever”.

Most WTO members want to avoid a unilateral withdrawal by the United States and seek reforms to make the global trade system fairer and more efficient. The snag is that the 23-year-old trading club is run on the basis of consensus, meaning that every one of its 164 members has an effective veto.

Ukrainian President Petro Poroshenko makes his annual address to parliament just as an International Monetary Fund mission wraps up two weeks of talks about new loans.

Kiev is hoping the IMF will announce it will grant new aid in return for reforms, notably an unpopular move to raise domestic gas prices to market levels. Interfax reported on Tuesday that a deal in principle had been reached to do that by 2020.


Global equities’ resilience this week in the face of an escalating trade conflict is already pretty remarkable, especially as signs are fairly significant economic damage is likely. A Reuters poll showed the trade war is likely to slow U.S. economic growth to 2 percent in the last quarter of 2019, less than half the reported rate of 4.2 percent.

Now here’s another conundrum. Stocks and emerging markets also seem so far impervious to U.S. 10-year yields marching higher – they are hitting four-month highs around 3.09 percent and approaching 2011 peaks.

And signs are the Federal Reserve meeting next week is set to be a hawkish one, delivering a rate rise and signalling more to come. But U.S. stocks posted more strong gains last night. They were led by bank shares that benefit from higher long-dated yields.

But this morning, Asian shares also marched higher, keeping world and emerging stocks near 2 1/2-week highs. Anyway, U.S. 10-year yields are trading just off their highs, and German yields have also eased off seven-week peaks touched yesterday.

Also interesting is the dollar’s retreat in recent days – it’s at seven-week lows against a basket of currencies  while commodity currencies such as the Aussie dollar and emerging currencies are firmer. That in itself is interesting given the 25-bp rise in 10-year U.S. yields since the start of this month – clearly that rise is not translating to the dollar.

One explanation could be that the rises are coming through because of inflation expectations rather than growth bullishness – the wage growth pickup in recent months would back up that view. But for now the dollar reversal is helping emerging-market assets while the yield jump has not slowed that move.

German yields show no sign of catching up, however, and that’s pushing the spread between Bunds and Treasuries to the highest since 1989. An emerging-market currency index has risen to the highest since end-August.

"We have yet to see an alternative text from the UK government that anybody in the European Union finds to be acceptable"

Sterling is trying to push higher this morning after being whacked by news the UK had rejected the EU’s improved plan for the Irish border and the EU asked London to rework its proposals. The currency could move after retail sales at 0830 GMT – recent horrendous sales numbers from the likes of John Lewis mean expectations are not high.

In central bank news, Norway is likely to raise interest rates for the first time in seven years at 0800 GMT, Switzerland should be on hold and South Africa is unlikely to follow other emerging markets in raising rates, after yesterday’s better-than-expected inflation data gave it some leeway. Brazil held rates overnight but hinted at raising rates going forward.

European shares opened higher and the 50 index was on track for a ninth straight session of gains as investors took a more bullish view of the China-U.S. trade war.

A focus for traders will be UK retail sales. Societe Generale analysts expect August data will show a drop in sales, after a strong spring and summer. Euro-area consumer confidence out later in the day would also be watched.

On the corporate front, a $3.2 billion share buyback from Rio Tinto is likely boost the shares around 2 percent.

Safestyle is down 4 percent after the window and door retailer and installer warned on profits and said it does not expect an "immediate recovery" to 2016 and 2017 levels of financial performance. The company’s poor performance adds to indications Brits are holding off spending on big-ticket home improvement products in an uncertain environment.

German fashion retailer Tom Tailor issued a profit warning that traders predicted would cut 10 percent off the stock.

Inmarsat shares were seen rising 2 percent after the British satellite company said it would collaborate with Japan’s Panasonic Avionics to provide in-flight broadband for commercial airlines.

The stress in emerging markets is beginning to be felt by some companies with large operations and revenues from EM: Diageo, the world’s biggest spirits company, said it expects this year’s selloff in some emerging-market currencies to knock 175 million pounds off net sales and 45 million off full-year profits.

Lower market volatility, meanwhile, hurt quarterly revenue at trading platform IG Group.

Nestle was expected to rise 0.5 percent after it said it was exploring strategic options for its skin health business.

Emerging markets were up for a third straight day but the gains had slowed to a trickle as investors waited for new economic plans from Turkey and an interest rate meeting in South Africa.

Sources have said Turkey will cut its growth forecasts for this year and next in its economic plan. Finance Minister Berat Albayrak will release the programme 0800 GMT. 

Traders watch the price of X Financial, a Chinese technology personal finance company, following the company's IPO on the floor of the New York Stock Exchange, September 19, 2018

South Africa’s central bank is expected to keep interest rates at 6.5 percent and the rand is back in vogue – at its highest in three weeks and for the 10th day in the last 11.

China plans to reduce the average tariff rate on imports from most of its trading partners as soon as October, Bloomberg reports.

— A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Sujata Rao. The views expressed are their own —

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