July 11, 2019 / 7:36 AM / a year ago

Daily Briefing: French tech tax adds to global trade tensions

LONDON (Reuters) - A new battle may be starting in the multi-fronted global trade war with Donald Trump ordering an investigation into France's planned digital services tax on tech companies, a levy Washington suspects could unfairly target American companies.

The 3% tax on the French revenue of large internet groups could yield 500 million euros and would target around 30 companies - mostly U.S. firms such as Google, Amazon and Facebook but also some Chinese and European ones.

Today the French upper house is due to vote on it. Any U.S. probe could take up to a year: if the conclusion is that U.S. companies are being unfairly targeted, expect new tariffs or other trade penalties.

German Chancellor Angela Merkel's meeting with Denmark's new Social Democratic PM Mette Frederiksen today will garner more attention than it would usually merit after Merkel was filmed with a third bout of involuntary shaking during military honours for Finland's new prime minister on Wednesday.

Questioned about her health, Merkel said she was fine but for the first time acknowledged she was “working through” an issue that was first spotted publicly blast month.

However she gave no details of any medical advice or treatment and there are now calls in German media - typically more respectful of the privacy of politicians than the Anglo-Saxon press - for more transparency.

German annual inflation accelerated to 1.5% in June, yet remained below the European Central Bank’s target, final data from the Federal Statistics Office showed this morning.

Later, the ECB is due to publish minutes of June policy meeting which, together with Mario Draghi's unexpectedly dovish remarks at the ECB's annual away-day in Sintra on June 18, will set the tone for the bank's next meeting in two weeks' time.

Markets have already priced in 15-20 basis points of cuts in the ECB’s minus 0.40% deposit rate — a big change compared to the start of the year, when rate hikes were firmly on the table.


Powell has fired up the “half pointers” once again.

Although the Fed chairman’s congressional testimony merely underlined the Fed case for easing policy to insure against the economic effects of a trade war and sub-target inflation, it was enough to get futures markets back pricing in a 1-in-4 chance of 50 basis point cut later this month. On Tuesday, only a quarter point was priced and no more.

Federal Reserve Chairman Jerome Powell testifies during a House Financial Services Committee hearing in Washington, July 10, 2019. REUTERS/Erin Scott

The shift back to thinking in terms of 50bp buoyed stock and bond markets once again, even though minutes of the Fed latest policy minutes were far more cautious and St Louis Fed chief Bullard restated his belief that 50bp would be too much at this point.

The release of U.S. consumer price inflation numbers later today will also give markets pause for thought as the Fed will want to see consistent data cover for its decision to start easing policy once again.

And rising oil prices, where Brent crude has topped $67 for the first time since May, may also cool the easing mood a touch. Nevertheless, Wall St stocks hit fresh record highs on Wednesday, with the S&P500 briefly topping 3,000 for the first time ever.

Ten-year Treasury yields settled back below 2.05% first thing today, the yield curve between 3 months and 10 years remains inverted to the tune of 15bp and the dollar’s DXY index was on the backfoot after its biggest drop in about three weeks on Wednesday. Dollar/yen slipped back below 108, with euro/dollar up as high as $1.1270.

On top of the dovish interpretation of Powell’s testimony, some media reports that President Donald Trump is asking top advisers for ways to weaken the dollar also weighed on the greenback. And if Powell put trade wars at the centre of his concern for the economy, then there was plenty of fresh worries to keep him anxious.

Even though telephone trade talks between Washington and Beijing have reportedly resumed, U.S. pressure on Europe has gone up a notch.

Trump on Wednesday ordered an investigation into France’s planned tax on technology companies, a probe that could lead to the United States imposing new tariffs or other trade restrictions. The move gives Trade Representative Robert Lighthizer up to a year to investigate if France’s digital-tax plan would hurt U.S. technology companies.

German Economy Minister Peter Altmaier, meantime, said he would meet with Lighthizer on Thursday to discuss efforts to settle a dispute over subsidies to planemaker Boeing and Europe's Airbus.  But Germany's transatlantic coordinator and member of parliament Peter Beyer said European Union member states should brace for U.S. tariffs on several fronts in the months ahead.

Central bank speculation held sway first thing, however. European stocks were set for gains of about 0.5% after the Powell set-piece. European Central Bank minutes from its latest policy meeting are due out later. Asia stocks were steady to firmer earlier, with Seoul’s Kospi outperforming with gains of more than 1%.                              

On the corporate news front, Germany's Aumann, Krones and Deutsche Beteiligungs have issued warnings on profits, sending their shares down 8-10% in pre-market trade. Europe's largest sugar refiner, Suedzucker, is seen 7% lower as it continues to struggle with a collapse in world sugar prices.

In positive news, Barry Callebaut is rising 2.6% premarket after the Swiss chocolate maker confirmed its mid-term guidance and posted an acceleration in sales volumes for the nine months to May 31.

But news not related to results may take the spotlight this morning. The boss of Europe's Ryanair has warned the impact of the prolonged grounding of Boeing's 737 MAX on the budget airline's growth plans may start to spill over to next summer if the airplane is not flying again by November.

Swiss Re is seen 0.5% lower after suspending its planned $4.1 billion public offering of its UK life insurance company ReAssure citing weak demand from institutional investors. 

— 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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