October 18, 2018 / 7:30 AM / a month ago

Daily Briefing: No breakthrough, no row at Brexit summit

LONDON (Reuters) - British PM Theresa May’s encounter with her EU peers yielded nothing materially new, as expected, but at least the post-summit mood appears to be less poisonous than that after the Salzburg meeting of a few weeks back.

Traders work on the floor of the New York Stock Exchange, October 17, 2018

Provisional plans for a one-off November summit have been put on hold unless Brexit negotiator Michel Barnier spots major progress between now and then. That could end up compressing the timeframe for a deal further - but then there was always a strong chance that this would have to go down to the wire at the EU's regular December summit anyhow.

UK media have latched onto EU officials' statements that May said she would consider a proposal to extend the post-Brexit transition by a year if needed ("Brextra Time! screams a dismayed Sun headline) and hard Brexiters at home are predictably enraged. With May having left Brussels, EU leaders now get down to other matters such as strengthening the euro zone, with final news conferences due mid- to late-afternoon.

Italian Prime Minister Giuseppe Conte has said he sees no room for changing the Italian draft budget for 2019 ahead of the meeting in Rome this afternoon between EU Commissioner Pierre Moscovici and Economy Minister Giovanni Tria. The two are due to hold a joint news conference at which Moscovici could give the clearest signals yet about what action Brussels intends to take on the expansionary budget.

Separately, in what is surely a jibe at critics in Berlin and elsewhere, Italian Deputy Prime Minister Matteo Salvini is being quoted as saying he may consider running for the presidency of the European Commission, the watchdog of the EU's rules.

MARKETS AT 0655 GMT

This week’s world market bounce has faded fast as hawkish noises from the Federal Reserve, some negative earnings surprises and the U.S. Treasury’s report on trade-related currency manipulation have all quickly eclipsed any renewed optimism.

Although the Treasury report didn’t formally designate China as a currency manipulator, it detailed concerns about how Beijing has allowed the yuan to slide this year as U.S. tariffs were imposed and it was widely seen as a warning about further trade restrictions.

The onshore yuan has fallen to its lowest since January last year and Shanghai stocks plummeted more than 2 percent to their lowest in four years – now down more than 30 percent from 2018’s peaks and fully half their levels just three years ago. Other Asia bourses from HK to Seoul to Tokyo were all in the red too, but all by less than 1 percent.

The minutes of the Fed’s latest policy meeting added to the angst, showing the decision to raise rates last month was unanimous and the policymaking committee all behind further tightening despite repeated criticism from U.S. President Donald Trump.

The combination of Fed and China fears pushed 10-year Treasury yields back above 3.2 percent for the first time in over a week, lifting the dollar broadly. Euro/dollar skidded below $1.15 overnight, the dollar’s DXY index was higher and Japan’s yen outperformed amid the fresh equity market jitters.

Wall St stocks ended slightly lower late Wednesday, with disappointing Q3 updates from the likes of IBM and Home Depot souring the mood along with the spikey Fed minutes. The Chinese nerves and higher dollar dragged MSCI’s emerging market index down 0.8 percent early Thursday and a tentative recovery in many emerging market currencies was stopped in its tracks.

Sterling was weaker against the euro and dollar as indications from this week’s European Union summit on Brexit were that a deal with the UK was still some way off and there was insufficient progress to call a special summit on the issue for November. That now pushes the timeline to December 14’s summit and right to the wire for parliamentary approval in time for a formal exit from the bloc next March.

Softer-than-forecast UK inflation numbers for September also weighed on the pound, with traders eyeing today’s retail sales report for further guidance. 

Italy’s 10-year bond yield spreads over Germany widened back out to 310 basis points for the first time in a week as Italy prepared to tap syndicated international bond markets and amid reports of some divisions within the ruling Italian coalition government over different measures in its controversial deficit-boosting budget.

Italian PM Conte insisted on Thursday there were no splits in the government over the budget and expected constructive dialogue with Brussels despite expected criticism.

Europe Inc goes further into a Q3 season in which it can’t afford to disappoint if it is to end 2018 in positive territory or try to catch up with a buoyant Wall Street.

With expectations that underperformers will get severely beaten for missing consensus, Pernod Ricard warned of slower growth, but overall its results were seen as positive. Unilever Q3 sales were lower than expected. Things are looking better for Ericsson which posted results above forecast and SAP which raised guidance.

— 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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