LONDON (Reuters) - The European Central Bank will try to give the ailing euro zone economy a fresh boost today - but ECB President Mario Draghi will want to keep some powder dry as an escalating global trade war could necessitate further action down the line.
In a long-flagged move, the ECB will likely offer new sets of loans that will effectively pay banks if they borrow cash to pass it on to households and firms. Beyond that, expect Draghi to keep the overall tone dovish by keeping the door open to further stimulus and maintaining the prospect of a further delay in the bank’s first post-crisis rate hike.
A by-election in the eastern English city of Peterborough today could have repercussions beyond the merely local if, as many expect, the newly-formed Brexit Party of Nigel Farage wins the formerly opposition Labour seat.
Peterborough voted firmly for Brexit in the June 2016 referendum and the failure of the ruling Conservatives to bring the UK out of the EU since then is seen being punished mercilessly by voters.
The Brexit Party candidate, a local businessman called Mike Greene, is comfortably ahead in polls. If that result is confirmed, it will further put the frighteners on Conservative lawmakers, many of whom will then be in self-preservation mode and look for the party leadership candidate most likely to win a snap general election -- if it comes to one. A fair proportion of those will conclude the answer is hard Brexiter Boris Johnson.
Social Democratic leader Mette Frederiksen, 41, is set to become Denmark's youngest-ever prime minister as the opposition made it a hat-trick of wins by the left in Nordic states. Frederiksen's tougher stance on immigration and promises of increased welfare spending persuaded voters to end two decades of liberal economic reforms.
The vote for the right-wing nationalist Danish People’s Party more than halved, as mainstream parties took a harder line on immigration. Frederiksen will rely on smaller leftist parties and their softer position on immigration may be a source of tensions.
MARKETS AT 0655 GMT
World stock markets are currently in the tug of war between the gloom surrounding trade tensions, U.S. protectionism and recession fears and the offsetting positive of the past week’s dramatic rethink of Federal Reserve and other central banks’ policy trajectories toward further easing.
Will, or even can, central banks’ act fast enough to stave off a U.S. recession and global downturn? Or does it all now hinge on Washington’s aggressive stance on trade tariffs with China and, most recently, Mexico? The negative side certainly pulled hard over the past 24 hours.
Talks broke down last night between U.S. and Mexican officials on averting planned U.S. tariffs to force migration controls at the U.S.-Mexico border. President Trump said first thing that tariff rises against both China and Mexico would go ahead unless there was movement in talks with both countries.
The combined hit to the U.S. economy next year of both planned tariff increases against China and Mexico is estimated by many economists to be as much as 1 percentage point and would likely be enough in many models to tip the world’s largest economy into technical recession – in the middle of an election year.
And the U.S. and global economies are already slowing, evidence on Wednesday by surprising weak private sector jobs reading for May and a drop in JPMorgan’s global all-industry business survey index to its lowest since June 2016. The International Monetary Fund, meantime, warned that a widening of the U.S.-China trade war could slash 0.5%, or some $455 billion, off world output next year.
But while the Mexican peso has dropped 1% against the dollar since the talks breakdown last night, and many other emerging market currencies have weakened in response, the net impact on world equities has been more benign due to stepped up Fed easing expectations and an expected dovish signal from the European Central Bank later on Thursday.
Wall St stocks ended up 0.8% as futures markets rushed to price a Fed rate cut as soon as its June 19 meeting and up to three cuts in total by yearend. Ten-year U.S. Treasury yields are hovering near two year lows just under 2.1%, while the recession red flag from the yield curve is still showing a 24 basis point inversion between 3 months and 10 years.
European rate futures have shifted to price the chance of yet another cut in the ECB’s already negative -0.4% deposit rate by yearend while many now assume it will cut inflation forecasts and signal more generous terms on its new targeted cheap loan scheme, or TLTROs.
With markets now assigning a 70% chance of another 10 basis point deposit rate cut this year, Germany’s 10-year bund yield hit a record low of minus 24 basis points first thing on Thursday ahead of the ECB meeting.
India’s central bank cut interest rates overnight again too. Asia stock markets were flat to negative, with Shanghai underperforming with losses of more than 1%. European and U.S. stock futures were slightly negative, with the former also hit by news that Fiat Chrysler suddenly dropped its $35 billion merger offer for Renault, blaming French politics. Fiat Chrysler are down 3-5% in premarket trade and Renault down 5-10%.
Going into the ECB meeting, European markets were also nervous about the European Commission ruling that Italy had breached its budget rules and it would now set in motion the long-winded process of a formal ‘excessive deficit procedure’. The ruling hit Italian bank stocks and sovereign bonds on Wednesday.
In currency markets, euro/dollar held just above $1.12 against a firmer dollar. Emerging market currencies were softer, with South Africa’s rand weakened to its lowest level since October amid rising concerns about proposed changes to the Reserve Bank’s policy mandate after news of the biggest economic contraction in 10 years in the first quarter.
— A look at the day ahead from EMEA Head of Desk Jon Boyle and EMEA markets editor Mike Dolan. The views expressed are their own —