LONDON (Reuters) - By the time European leaders meet in Brussels this afternoon, European Trade Commissioner Cecilia Malmstrom will have returned from talks with U.S. officials aimed at securing an exemption from new steel and aluminium duties set to take effect from Friday.
The signs of averting an escalation look promising: U.S. Trade Representative Robert Lighthizer confirmed the talks and said he was hoping for an agreement by the end of next month. The final word, however, must come from Donald Trump.
French teachers, hospital nurses, train conductors and airline controllers are due to walk off the job and take to the streets today in a test of public anger with President Emmanuel Macron's package of economic reforms.
This comes ahead of rolling train strikes called to protest at a planned overhaul of the state SNCF company. What the government wants at all costs is to avoid a merging of all the various protests into one big act of resistance to the government, as has happened famously in the past.
In an attempt to take the sting out of some of the moves, the government on Tuesday agreed to shield France’s poorest pensioners from a planned tax hike. Public opinion is curiously ambivalent: polls show a majority of voters back the public sector workers’ strike, but an even bigger majority also back the reforms.
Bank of England policymakers are widely seen making no move today and keeping their powder dry for a rate hike in May. The UK economy stuttered in early 2018 and the snow of March adds to the likelihood of a slight cut to the BoE’s growth forecast for the first quarter.
Data on Wednesday showed wages rose at the fastest pace in nearly two-and-a-half years in the first quarter, over the three months to January, adding to expectations of a move in May. Financial markets are watching for whether any of the policymakers vote today for a hike; but for now, the Reuters poll points to a 9-0 vote in favour of keeping rates on hold.
Three it still is. Markets’ worst fears that the U.S. Federal Reserve would start to get more aggressive in its monetary tightening were not realised last night.
An upbeat Fed has kept close to the script and signalled just two more interest rate rises this year after last’s night quarter point hike, despite many banks, including JPMorgan and Goldman Sachs, still betting on four in total. The Fed did nudge up its expected rate rises next year from two to three, but this had been largely expected.
The net result was a retreat in U.S. Treasury yields and the dollar, with 10-year Treasuries back below 2.86 percent this morning from a high of 2.9360 percent around the Fed decision last night and the 2-10 yield curve steady about 56 basis points. European sovereign bond yields are falling in the slipstream this morning, with eyes on incoming flash business surveys for March later on Thursday.
At its lowest in two weeks, the dollar index is still falling this morning after it biggest one-day drop on Wednesday since late January. Euro/dollar is higher about $1.2380 and sterling hit its best levels against the dollar since February 2 ahead of the Bank of England’s policy decision and statement later on Thursday, amid speculation about a UK interest rate rise as soon as May.
After an initial rally, equity markets went flat on the Fed decision – with attention dragged to many other issues from today’s expected signing of U.S. trade tariffs on $60 billion of Chinese imports to the troubles facing Facebook and other internet and social media stocks.
Today’s European Union summit in Brussels, for example, is expected to agree on a 3 percent turnover tax on large companies with significant digital revenues in the EU such as Google and Facebook. Even though Facebook stock steadied after this week’s slide of more than 10 percent, as CEO Zuckerberg detailed ways in which company planned to better protect users’ personal data, Wall St’s benchmark indices ended slightly in the red after the Fed.
The S&P500 was down 0.18 percent and the Vix volatility gauge was firmer just under 19 percent. Energy stocks did well as oil prices jumped on tightening supply data and worries about the Iran nuclear deal. Brent crude rose close to $70, its highest since Feb 2.
Shanghai and HK stocks were lower overnight ahead of the U.S. tariff moves later and as the U.S. Treasury talked of using investment restrictions on China too. China’s central bank also nudged up a key market interest rate by 5 basis points in response to last night’s Fed move. The HK dollar continued to edge lower toward the lower reaches of its target trading band.
Other major Asia bourses were more buoyant. Japan’s Nikkei was up 1 percent and South Korea’s Kospi was up almost half a percent. European stocks were more negative, with futures down about half a percentage point as March business surveys were watched closely. New Zealand’s central bank left interest rates unchanged earlier. Brazil’s central bank also cut rates as expected by 25 bps to a record low of 6.5 percent to revive lacklustre inflation, while signalling more cuts ahead.
Earnings and M&A continue to drive European stocks, which are set to fall at the open with futures down 0.3 to 0.6 percent. The world’s no.2 cement maker Heidelberg Cement, seen as an indicator of Chinese demand, reported record profits and better than expected synergies in its Italcementi takeover, driving it to hike its dividend by a fifth – though the payout fell slightly short of analysts’ average expectations. The stock was indicated flat in pre-market.
Reckitt Benckiser shares were seen rising up to 5 percent after the company pulled out of the running for Pfizer’s consumer health business. Traders said the market was worried Reckitt would overpay for the acquisition target. A report that GSK is now in pole position for the Pfizer unit was also doing the rounds in trader notes before the open.
In a further sign that E.ON and RWE’s break-up of Innogy has improved sentiment on the German utility stocks, a government source said the state of Bavaria has scrapped plans to sell its 1.4 percent stake in E.ON.
And the latest UK retailer to report seems to be bucking the trend of disappointing performance: Ted Baker said online sales surged, helping it to a 12 percent jump in profit.
Hot on the heels of the Fed, a number of emerging market central banks hike rates. China is one of the first out of the starting blocks, adding a symbolic 5 basis points to the reverse repo rate under new governor Yi Gang in a nod that the PBOC is watching global policy makers.
Those with dollar pegs follow suit, with Hong Kong, Kuwait and Bahrain matching the 25 bps hike. Hong Kong policymakers also repeat they are ready to defend the peg as the Hong Kong dollar hits a fresh 33-year low of 7.8469 to the dollar, edging ever closer to the bottom of the band at 7.85.
Emerging market borrowing costs edge higher, with the average yield spread of emerging hard currency debt over U.S. Treasuries widening again to hit its highest level in more than four months.
Currencies broadly breathe a sigh of relief against a defensive dollar, with South Africa’s rand, Turkey’s lira and Russia’s rouble all strengthening some 0.2-0.4 percent.
Peru’s sol is one of the biggest gainers, adding 0.5 percent after the president - ensnared in vote buying allegations - resigned hours before facing a near-certain impeachment with prosecutors trying to block him from leaving the country. However, Peru’s dollar bond spreads hit a six-month high. Though trade war talk weighs on some Asian currencies with South Korea’s won weakening 0.7 percent in a choppy trading session.
Stocks overall edging lower by 0.2 percent, weighed down by losses in heavyweight Hong Kong and mainland China bourses which tumble more than 1 percent.
Overnight, Brazil’s central bank also cut rates as expected by 25 bps to a record low of 6.5 percent to revive lacklustre inflation, while signalling more cuts ahead.
— 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. —