November 1, 2018 / 8:31 AM / 14 days ago

Daily Briefing: Hopes rise for UK-EU pact on City

LONDON (Reuters) - Sterling has jumped on a Times report that the UK has struck a tentative deal with the European Union that would give UK financial services companies continued access to European markets after Brexit.

Traders work on the floor of the New York Stock Exchange, October 31, 2018

According to the report, the EU will accept that the UK has “equivalent” regulations to Brussels, allowing UK companies to operate as they now do in Europe. It noted that whereas existing equivalence arrangements for third countries can be cancelled unilaterally at only a month’s notice, the UK-EU deal would require prior consultation.

Later the UK focus will be on manufacturing PMI data due this morning and the Bank of England's policy meeting, where expectations are firmly for no change.

In a rare joint intervention on the eve of a big Shanghai trade expo, Germany and France have urged Beijing to do more to level the playing field for European businesses in China and address concerns about the business environment through "concrete and systematic measures".

In an op-ed in the business magazine Caixin, the German and French ambassadors to China said European businesses should have the same opportunities in China as Chinese industries have in Europe.

The appeal comes after a new strategy paper from Germany's influential BDI industry federation, a draft of which was seen by Reuters, calls on firms to reduce their dependence on the Chinese market in a sign of rising concern over Beijing's state-driven economic model.

Manufacturing PMI data for the euro zone and beyond are due this morning, the latest read-out on the region’s economy after a weak growth number but sturdy inflation report already this week.

While evidence of weakness and concerns over risks have lent weight to a debate over the ECB's plans to wean the region from stimulus, its policy-makers remain committed in public and private to turning off the tap next month as planned.

MARKETS AT 0755 GMT

Wall St’s plucky end to a lousy October helped buoy all bourses around the world yesterday, though the start of a new month has Asia stocks stuttering yet again and Europe back in the red.

In the end, the S&P500’s two-day 2.6 percent bounce helped take the edge off October losses but it remained the worst month in seven years with almost 7 percent wiped off the index.

Much like the myriad reasons cited for the slide, the bounce had no one trigger. Instead, a mix of punchy Q3 earnings growth of about 26 percent, decent margin performance and buoyant economic reports such as above-forecast private sector job creation in October and 18-year high consumer confidence readings combined with some old-fashioned bargain hunting and re-positioning ahead of next week’s U.S. mid-term elections.

There are also hopes the coming end of earnings season’s blackout period for share buybacks will see another wave of stock purchases by year-end. Apple also reports earnings after the bell tonight.

Asia bourses gave up early gains overnight, with Shanghai stocks ending little changed and Japan’s Nikkei and Seoul’s Kospi ending in the red. HK stocks outperformed with gains of more than 1 percent.

Much attention has been on China’s latest fiscal stimulus and planned infrastructure spending, which some analysts estimate could be as high as 9 trillion yuan. The yuan rebounded from its recent slide to near decade lows also as the dollar pulled back sharply overnight from 16-month highs.

One of the drivers of the dollar’s retreat was sterling, which staged a sharp rally over the past 24 hours from 2-1/2 month lows after two relatively positive reports on the chances of a Brexit deal between the UK and the European Union.

"The end is now firmly in sight and, while obstacles remain, it cannot be beyond us to navigate them. We have resolved most of the issues"

Indications from UK Brexit minister Raab on Wednesday afternoon that a deal could be sealed by November 21 started the pound’s rebound, which extended overnight after reports agreement on allowing UK financial firms access to EU markets after Brexit had also been reached.

Sterling, which had dipped below $1.27 earlier in the week, has jumped back close to $1.29. The Bank of England delivers its latest policy decision later today, but is not expected to indicate any major changes.

Elsewhere, the dollar’s recoil has taken renewed pressure off emerging market currencies – but Turkey’s lira continued to retreat early Thursday after announcements of planned tax cuts unnerved foreign investors who had been told repeatedly over recent months that the government would rein in its budget. Business surveys showing a contraction of manufacturing activity for the 7th straight month added to the pressure.

European shares are set to open lower today with a mixed bag of corporate updates curbing enthusiasm after yesterday’s Halloween rally pushed the STOXX 600 regional benchmark further away from the 22-month lows hit last week.

Euro zone stock futures were trading down around 0.5 percent with FTSE futures lagging behind, down 0.7 percent, as the pound strengthened on renewed Brexit optimism sparked by reports of deal on financial services.

In the cheap but unloved banking sectors, Credit Suisse was called down 1-3 percent after third-quarter profit at Switzerland's second-biggest bank lagged estimates even though it soared 74 percent as operating expenses fell faster than a 2 percent decline in net revenues.

Danske Bank profits fell more than expected, while Dutch lender ING (+2% pre-market) posted a better-than-expected profit as it continued to grow on an underlying basis despite being fined for failures to prevent money laundering.

Also on the watchlist is Lonza after news it sold its water care business for $630 mln, while miner BHP could get a lift after it stuck to its promise of returning $10.4 bln to shareholders.

Eyes also on BT (+3% premarket) after the British broadband company reported a 2 percent rise in first-half earnings and nudged its guidance for the full year higher. In the oil sector, which already got a big boost this week from "blowout" numbers from BP, profits at Shell soared to a four-year high but missed analyst estimates.

Emerging stocks are gaining for a third straight session to hit an eight day high, adding 0.6 percent with China mainland shares showing healthy gains on Beijing’s vowed more support and shrugging off tepid factory day.

Many emerging currencies profit from a softer dollar, with China’s yuan strengthening around 0.4 percent through the 6.95 threshold on a firmer fix. South Africa’s rand firms 0.8 percent.

But there is no respite for the Turkish lira, which softens 0.8 percent as manufacturing PMIs show a contracting manufacturing sector for the seventh straight month. Russian manufacturing PMIs are at a six month high.

— 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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