April 19, 2018 / 7:59 AM / in 5 months

Daily Briefing: Test run for Franco-German motor

LONDON (Reuters) - Germany's Angela Merkel welcomes French President Emmanuel Macron to Berlin this morning for talks on how to make sure the euro zone can fight off any repeat of the 2009 sovereign debt crisis that nearly wrecked the currency.

In the run-up to the encounter, Merkel has plotted a careful line between keeping her conservative allies happy and responding to Macron’s call for ambitious reform. Much of the focus has been around the creation of a so-called European Monetary Fund styled on the IMF that would be able to bail out future nations in need. With tax-paying German voters breathing down her neck, Merkel insists any such fund should remain under national control - in other words, Berlin could veto any disbursement.

Other EU leaders and Brussels will watch today’s meeting closely from the sidelines: they know that Franco-German agreement is essential for there to be progress on this at an end-June summit of the EU. Today is a test of how the so-called Franco-German motor that has driven EU integration for decades is running under Macron-Merkel.

Local Spanish media is reporting that Basque militant group ETA will announce its final dissolution early next month. During a campaign that lasted nearly half a century, ETA killed more than 850 people in a vain effort to create a Basque state in northern Spain and southwest France. But it declared a ceasefire in 2011 and handed over its arms a year ago.

The possible final dissolution comes as Spain continues to grapple with separatist aspirations in Catalonia. Madrid managed to contain the Basque problem by granting the region wide-reaching tax autonomy: that solution has been mooted by some for Catalonia but the reality is that it would probably be way too costly for national public finances.

Things may be moving in Italian politics. After the country's president asked the head of the upper house to try and break the deadlock, the anti-establishment 5-Star Movement has given the far-right League a deadline of the end of this week to abandon its right-wing electoral allies and form a government together. 5-Star leader Luigi Di Maio did not say what would happen if the League failed to make the deadline. If all efforts to break the stalemate fail, Italy will be heading towards new elections.


All the buzz in world markets overnight was about surging commodity prices, with oil and metals prices leading the way and catapulting the broad Commodity Research Bureau index of commodity prices to its highest level since July 2015.

A woman watches a news programme announcing the dissolution of armed Basque separatists ETA in Guernica, April 18, 2018

Wednesday’s rise was the biggest one-day jump in the CRB in eight months. Metals such aluminium and nickel have been surging all month due supply concerns related to U.S. sanctions on Russian mining firms such as Rusal. Aluminium prices are up 30 percent so far in April and Nickel has jumped 20 percent this week alone.

Brent crude oil prices have also surged this week, gaining more than 3 percent yesterday and briefly topping $74 overnight after a Reuters report that Saudi Arabia was now happy to see oil prices go as high as $80 per barrel. Apart from supply issues, it’s less clear what the commodities jump says about the broader global economy and markets. There’s also been some rebound in optimism about world economic activity over the past couple of weeks as the second quarter gets underway and impressive Q1 U.S. corporate earnings start to stream in.

IBM’s big miss aside, U.S. profit growth so far is beating pretty elevated expectations and Bank of New York Mellon and Visa are among those out later today. Shipping prices too, seen by some as one proxy of trade activity, had been ebbing all year but have bounced back smartly in April. U.S. rail transport firm CSX reported a strong first quarter late yesterday.

The jump in oil and metals prices has also caught the eye of inflation watchers and nudged global bond yields higher alongside the big resource stocks. The whole picture was enough to keep the S&P500 in the black late Wednesday and Asia bourses were all up strongly earlier.

U.S. and European stock futures were slightly higher again first thing. Currency markets were much quieter, with the dollar little changed against the other majors. Sterling was nursing its wounds after a big retreat Wednesday on softer-than-forecast UK inflation numbers for March – data that may not deflect the Bank of England from raising interest rates next month but may remove expectations of a second hike later this year.

Emerging market currencies were more active. Turkey’s lira slipped back 0.4 percent against the dollar after its biggest one day gain in more than a year on Wednesday when President Tayyip Erdogan declared early elections on June 24.

Russia’s rouble firmed 0.2 percent to its strongest in just over a week, helped by the higher oil price and after ratings agency Moody’s said Russia’s strong public and external finances would shield its economy from the impact of the latest U.S. sanctions even if the sanctions were credit negative for some Russian debt issuers such as Rusal.

South Korea’s won outperformed its regional peers, gaining as much as 0.7 percent to touch a two-week high after U.S. CIA director Mike Pompeo’s meeting with North Korea leader Kim Jong Un helped alleviate geopolitical risk.

— 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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