April 4, 2019 / 7:29 AM / 2 months ago

Daily Briefing: Slump for German orders adds to euro zone fears

LONDON (Reuters) - Truly dreadful data out this morning show that German industrial orders fell at their sharpest rate in more than two years in February, hit by a slump in foreign demand with Brexit uncertainty a possible contributory factor.

FILE PHOTO: A steel worker at a blast furnace at Germany's largest steel factory in Duisburg

Contracts for German goods slumped by fully 4.2 percent, double the rate of decline in January. While monthly industrial order data are highly volatile this will add to concerns that the eurozone’s largest economy has had a weak start to the year and suggest that more bad read-outs are to come.

Later today Germany's main economic institutes are due to present revised GDP growth forecasts, while the ECB will publish its account of the March Governing Council meeting at which it pushed out the timing of its first post-crisis rate hike to next year at the earliest.

Talks on a Brexit compromise are expected to resume today on a technical level between the teams of British PM Theresa May and Labour leader Jeremy Corbyn after yesterday's first encounter, which was inconclusive but at least did not end in overt acrimony.

An anti-Brexit protester demonstrates outside the Houses of Parliament, April 3, 2019

Corbyn said he raised, albeit in a guarded way, the possibility of a second referendum to confirm backing for a final Brexit compromise but there is no sign yet of May warming to that.

Equally, there was no visible movement on whether the UK should remain in a customs union with the EU, a key Labour demand. Conservative voices today are raising the idea of a temporary customs union with the EU, although it is not clear that the EU would agree to such an arrangement.

Likewise an exclusively domestic debate about what kind of Article 50 extension the UK might need is in full flow this morning without any reference to what Brussels might actually accept.

In other Brexit news, Angela Merkel heads to Ireland today to meet people who live on the border with Northern Ireland - potentially the outer frontier of the EU's single market in a matter of days if no deal is reached.

NATO foreign ministers are holding their regular April meeting in Washington rather than Brussels this year as they celebrate the 70th anniversary of the U.S.-led alliance. Yet the event will be held under a cloud of transatlantic tensions, with Washington this week again singling out Germany for criticism for not spending enough on defence and proceeding to build the Russian-backed Nord Stream 2 gas pipeline.

MARKETS AT 0655 GMT

The latest rally in world equities mostly held up overnight as more positive noises about an imminent U.S.-China trade deal emerged, but the incoming economic numbers from Europe and the United States refuse to play ball.

German industrial orders plunged 4.2 percent in February, according to data releases early on Thursday, and undermined hopes of a new year manufacturing rebound in Europe’s biggest economy.

While the data series is noisy from month to month, it reinforces a glum picture for European industry and the European Central Bank’s new found dovishness. European stock futures were lower ahead of the open and the 10-year German bund yield slipped back below zero after a brief pop back into positive territory on Tuesday. Euro/dollar held steady above $1.1230.

Although Shanghai stocks pushed higher earlier on reports the latest trade talks in Washington were nearing a deal that would give China until 2025 to meet demands on market purchases, access and foreign ownership rules, the rest of the major bourses stuttered. Japan and Seoul were little changed and HK was in the red. MSCI’s all-country stock index slipped back from six-month highs set on Wednesday.

While the S&P500 nudged higher late on Wednesday, with two thirds of stocks there now back above their 200-day moving average, U.S. stock futures were flat first thing. Ten-year Treasury yields slipped back, but held above 2.50 percent. The three-month to 10-year yield curve remained in positive territory.

With the Q1 earnings season looming, the economic picture stateside has been underwhelming – with sub-forecast readings from U.S. service sector surveys, retail sales and private sector job creation over the past week and the U.S. economic surprise index falling further to its most negative in 20 months.

The dollar was largely unchanged in quiet currency markets, however, with emerging market currency indices slipping lower. Awaiting some concrete outcome from cross-party Brexit talks between UK PM May and opposition Labour Party leader Corbyn, sterling held recent gains and hovered  just under $1.32. The Reserve Bank of India cut interest rates as expected.

On the European corporate front, the banking sector is catching the headlines this morning after a report that UniCredit is considering buying a stake in Commerzbank. Commerzbank shares are up almost 3 percent in early Frankfurt trade, while the Italian lender's shares are seen down more than 1 percent. 

The report is likely to stir hopes of a potential bidding war and consolidation across the fragmented European banking sector, although a source said talks between Deutsche and Commerzbank are proceeding well.

Elsewhere, Saga stock could fall as much as 30 percent after the over-50s tourism and insurance firm slashed its dividend and warned profits will fall as it struggles to keep up in a competitive motor and home insurance sector. One trader described the news release that also contained a strategy shift as a "kitchen sink job".

— 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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