July 26, 2018 / 8:16 AM / 3 months ago

Daily Briefing: ECB to stick with long goodbye to easy money

LONDON (Reuters) - The ECB is expected to keep policy unchanged on the grounds that the growing risk of a global trade war is not yet strong enough to scupper its plan to gradually exit its easy-money policy of the last few years.

FILE PHOTO: European Central Bank President Mario Draghi testifies before the European Parliament's Economic and Monetary Affairs Committee in Brussels, July 9, 2018

ECB President Mario Draghi may also firm up the central bank's guidance for ending a 2.6 trillion bond purchase scheme this year and acknowledge a modest improvement in incoming economic data. In Brexit-bound Britain, the Bank of England is expected next week to lift rates above their emergency levels of nine years ago.

Talking of Brexit, negotiations on Britain's EU divorce package resume in Brussels later in the day. Markets seemed to like the idea of Prime Minister Theresa May taking personal control of Britain's negotiations.

But with Germany pushing for concessions from London, including over the delicate issue of the land border with EU member Ireland, it may need more than her personal touch to elicit a change of tone – or substance – from Brussels.

MARKETS

So the author of "The Art of the Deal" has managed to get a deal with the EU on trade, seemingly having wrung some concessions out of the bloc.

The EU has agreed to more imports of U.S. soybeans and lower industrial tariffs among other things and Trump has agreed to hold off slapping tariffs on European cars. But the devil will be in the detail and the jury is out on whether a trade war has really been averted.

For now, though, markets like it. Wall Street jumped around one percent on the news while world stocks hit four month highs.

U.S. President Donald Trump and President of the European Commission Jean-Claude Juncker speak about trade relations in the Rose Garden of the White House, July 25, 2018

This morning European shares are set for an opening bounce; world and emerging stocks have crept higher too. However, there are clouds on the horizon. First, even assuming trade threats to the EU are receding, issues with China, arguably bigger, have not been ironed out.

Note that the deadline passed last night for Chinese regulators to approve Qualcomm’s $44 billion bid for NXP Semiconductors. Second is growth – three quarters of economists polled by Reuters see world growth as having peaked and a slowdown next year.

Data out of Korea appeared to confirm that picture, showing slower growth and exports. U.S. Q2 GDP due Friday is seen to have accelerated to 4.1 percent but that is again, likely to be the peak.

And what about company profits? A Q2 earnings miss by Facebook took its shares 24 percent lower last night in after-hours trade while carmakers Ford, Fiat Chrysler and GM all lowered outlooks. Today we have earnings from Amazon and Intel which will be closely watched.

On the policy front, we are entering a period when several big central banks discuss policy – Bank of Japan, the Fed and the Bank of England all meet next week and today we have the ECB kicking off things. We are unlikely to get the kind of excitement we saw last month when the bank set the doves loose by staying interest rates would not rise “through next summer”.

Today Draghi may not give away more on the timing but he will be asked about it as well as about the trade war issue, and to confirm a Reuters story that the ECB plans to buy longer bonds in its own version of the twist. A confirmation will likely re-ignite the rally in long-end bonds.

Greece is the other issue Draghi may be quizzed about – while it grapples with its forest fire tragedy, it’s about to exit its bailout in August and will be waiting to hear if it will become eligible for the ECB’s bond buying programme.

The euro is flat today after rising in the immediate aftermath of the Juncker-Trump meeting and euro zone bond yields are up 2-4 bps. The dollar has retreated a quarter percent to two week lows but expectations of more policy easing are keeping the yuan under the cosh; it’s heading back to recent 13 month lows. Data-wise, we’ll get the August consumer confidence print for Germany and July consumer confidence data for France. Later on, U.S. durable goods orders.

Germany’s exporter-heavy DAX has jumped 1.3 percent and the auto sector is up 1.5 percent with shares in carmakers up across the board including Daimler and Fiat which have shrugged off underwhelming results. The trade breakthrough comes on a very busy earnings day for Europe, with big hitters including Shell, Airbus, Diageo, AstraZeneca, Roche, AB InBev and Schneider Electric all giving updates.

Of note are Daimler's results in which its Q2 profit dropped 30 percent. This follows the all-too-familiar pattern seen at peers GM, Fiat and Ford where the trade tensions between the U.S. and China have resulted in them cutting forecasts (Daimler did so last month). Facebook's tumble in after-hours trading could put a dampener on tech stocks today.

— A look at the day ahead from EMEA Head of Desk Jon Boyle and EMEA Markets Deputy Editor Sujata Rao. The views expressed are their own —

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