June 18, 2019 / 7:53 AM / 3 months ago

Daily Briefing: And then there were three? UK PM race hots up

LONDON (Reuters) - British prime ministerial hopefuls need to secure the backing of at least 33 Conservative lawmakers in today’s second-round vote to stay in the race, with results expected around 6.00 p.m. local (1700 GMT).

PM hopeful Boris Johnson leaves his home in London, Britain, June 18, 2019. REUTERS/Henry Nicholls

Aside from front-runner Boris Johnson, only Foreign Secretary Jeremy Hunt and environment minister Michael Gove did that in the first round last week, meaning the field could be substantially whittled down today.

Even they are not guaranteed of getting through - the wild card so far has been little-known international development minister Rory Stewart, who scored 19 in the first round but was widely seen to have mounted the most convincing anti-Johnson challenge in a TV debate at the weekend.

Increasingly, the big spending and tax-cutting promises of leadership candidates of a party that has for years insisted on the need for austerity are coming in for criticism.

The European Parliament hopes today to finalise its stance on the bloc’s top jobs before 28 national leaders’ summit on Thursday.

Even if they do, there are signs Germany and France disagree on how to distribute those roles, meaning Thursday’s summit may fail to get the deal done.

Separately, a further point of contention is emerging as Cyprus threatened to bloc any agreement to start membership talks with North Macedonia and Albania unless European Union capitals issue a tougher warning to Turkey over gas drilling around the island.

The European Court of Justice rules this morning on a German proposal to introduce a toll on its autobahns for foreign cars only.

Neighbouring Austria took Germany to court, saying the law violated EU rules by discriminating against foreigners.

MARKETS AT 0655 GMT

Even though world markets are battening down the hatches before Wednesday’s policy decision from the U.S. Federal Reserve, rising tensions between the United States and Iran and mixed signals from economic data are complicating trading.

Before the Fed meeting gets underway, the European Central Bank gets to jump the gun.

ECB chief Draghi speaks at the central bank’s annual conference in Sintra, Portugal, this morning. Draghi will have to address the evaporation of both euro zone inflation expectations and sub-zero German 10-year bund yields to record lows.

The former – as measured by the five-year, five-year forward inflation swaps – has fallen to just above 1.1%, little more than half the ECB’s inflation target.

Equivalent U.S. inflation expectations have been falling, too, hence partly the reason for surge in Fed rate cut speculation, but the ECB’s problems are more intense.

It hasn’t even begun to normalise its interest rate structure; its key deposit rate remains minus 0.4%.

Whether Draghi signals another “whatever it takes” line to use all ECB tools to get inflation back to target remains to be seen.

Euro/dollar and German bund futures were a touch higher first thing, with European stock futures lower.

The June German ZEW investor confidence index is released this morning, too.

The dollar was weaker before the Fed meeting.

A plunge in a New York business sentiment survey for June – its largest monthly drop on record – and a retreat in homebuilder confidence this month were keeping Fed easing talk alive, even if the consensus is that it won’t move this week.

The numbers offset last week’s more upbeat U.S. industrial and retail readings from May.

But worries about business confidence are intense amid global trade and geopolitical tensions – with progress on the U.S.-China trade war hinging on the G20 summit in Japan later this month and the latter following military threats between Washington and Tehran.

Acting U.S. Defense Secretary Shanahan announced on Monday the deployment of about 1,000 more troops to the Middle East for what he said were defensive purposes, citing concern about a threat from Iran.

Iran said on Monday it would soon breach limits on how much enriched uranium it can stockpile, which a White House National Security Council spokesman said amounted to “nuclear blackmail.”

With eyes both on the impact of such tension on oil supplies and also on global economic demand, Brent crude oil prices slipped further below $61 first thing. Gold prices hit their highest in over a year on Monday.

Japan’s yen and top-rated sovereign debt were bid too, with 10-year U.S. Treasury yields slipping to 2.0720% first thing on the mix of the Gulf tensions and Fed speculation.

There were no fresh developments on the trade war, although U.S. Treasury data released late Monday showed China had cut its holdings of Treasury bonds and notes in April to its lowest since May 2017, raising fears Beijing could weaponize its holdings of U.S. government debt if trade tensions escalate.

Japan’s Nikkei dropped 0.7% earlier, but Shanghai stocks were steady and Hong Kong’s Hang Seng continued its rebound as political tensions in the city appeared to ease there.

South Korean stocks ended higher.

Elsewhere, sterling fell to its lowest since January against both the euro and dollar on Tuesday as speculation about a no-deal Brexit climbed amid the expected election of hardline Brexit supporter Boris Johnson to replace UK PM Theresa May.

Johnson will take part in his first TV debate with other candidates later on Tuesday.

European stocks were expected to slide on Tuesday after Siltronic became the latest chipmaker to warn the U.S.-China trade war was hurting its business.

A German semiconductor wafer maker, Siltronic’s profit warning followed Broadcom’s last week.

It doused any remaining hopes of a promised second-half recovery in the chip sector, with management saying the third quarter would likely see sales slide further after a second quarter “significantly below” the first quarter.

Siltronic’s shares were down 10% in pre-market trading, with shareholder Wacker Chemie also down 1.8%.

Traders saw the warning hurting semiconductor stocks across the region.

Shares in German chipmaker Infineon were down 3.8% in premarket trading after it began a 1.5 billion-euro capital increase to help fund its acquisition of Cypress Semiconductor.

 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.

 (Editing by Larry King)

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