LONDON (Reuters) - Preliminary talks on forming a new "grand coalition" to govern Germany are getting closer to the wire with today's deadline for Angela Merkel's conservatives and the opposition SPD to decide whether to enter formal negotiations.
Two of the toughest areas to agree on will be taxes and euro zone reform, with the SPD stronger advocates of deeper integration; and migrants, especially over whether family members should be allowed to join asylum seekers in Germany. It’s still possible the two parties might delay a final decision, as in practice they have up until Jan. 21, when the SPD will put any proposals to its grass roots, to find agreement.
Separately, economists expect German gross domestic product data due at 0900 GMT to show Europe's biggest economy expanded by more than 2 percent, the strongest rate in six years. That in turn will set the scene for the publication by the European Central Bank of the minutes of its December meeting at 1230 GMT.
Those may shed more light on how President Mario Draghi sidelined internal critics to confirm the ECB would continue buying bonds at least until September 2018 and keep interest rates at record lows well after that to support inflation in the euro zone.
Britain's forthcoming exit from the European Union was the main reason for a 37 percent decline in new jobs in London's financial sector last month, according to a new report from recruiting firm Morgan McKinley. Moreover, around 10,000 finance jobs will be shifted out of Britain or created overseas in the next few years if the country is denied access to Europe's single market, according to a Reuters survey of firms employing the bulk of workers in international finance.
Those are sobering statistics going into today's meeting between Prime Minister Theresa May and executives from major finance companies. The EU says there can be no special deal for the key British sector, but the UK believes the EU will be flexible, partly for fear of hurting European economies if they are cut off from London's markets.
The China/U.S. bond scare appears to have lasted less than 24 hours, as Beijing dismissed reports it might stop buying U.S. Treasuries as part of its foreign currency reserve management in a tit-for-tat for any U.S. protectionist moves against Chinese exports. Whatever the real story, 10-year U.S. Treasury yields have returned to their level before the report spooked the market early on Wednesday – even though at 2.5480 percent, they remain about 7 basis points higher on the week, and the 2-10 year yield curve similarly holds at more elevated levels about 57 basis points.
The other bond aggravator of the week, a perceived slowdown in the Bank of Japan's domestic government bond buying, also seemed to dissipate somewhat as the central bank maintained the same level of bond purchases on Thursday. What's more, the first 10-year benchmark government bond auctions of the year in the United States, Germany and Japan on Wednesday appear to go smoothly. U.S. stocks ended slightly in the red overnight due to the speed bump from the bond markets; Asia bourses were reasonably steady earlier.
China and Hong Kong stocks were slightly higher, even though Japan’s Nikkei and South Korea’s Kospi were down on the day heading into the Q4 earnings season as the yen gave back only a part of this week’s gains. Bank of America opens the U.S. earnings season later on Thursday.
The takeaways from the whole episode show how sensitive world markets are to any change in bond market dynamics that are still hooked on super-loose monetary policy - mainly in Japan and the euro zone - and peculiarly low inflation despite a global economic boom. European Central Bank policy meeting minutes released later today will be interesting in that regard. As historically low debt yields flatter returns in stock markets and keep credit cheap, they are a crucial ingredient in keeping one of the longest equity bull markets in history on the go.
Another irritant to bond yields this week has been the latest surge in international crude prices, and Brent remains close to its highest levels since 2015 above $69 per barrel overnight.
The other signal from this week's market wobble is that international trade is once again on the radar amid concerns U.S. President Donald Trump will emphasise protectionist measures as part of his State of the Union speech this month. Some analysts think that was why the Chinese stories may have been a deliberate shot across the bow. In addition, reports late Wednesday indicated the Trump administration is about to unilaterally walk away from the North America Free Trade Association.
The Canadian dollar and Mexican peso all weakened after the news. Dollar/yen aside, the greenback was firmer across the board as the Chinese speculation eased. Euro/dollar remained below $1.20, even as French business surveys for December beat forecasts. European stocks opened slightly higher along with ebbing European government bond yields. Elsewhere, Bitcoin tumbled another 10 percent after South Korea said it would move to ban cryptocurrency trading.
Editing by Larry King