February 7, 2017 / 8:54 AM / 9 months ago

Daily Briefing: Berlin-Warsaw - a thaw in sight?

LONDON (Reuters) - German Chancellor Angela Merkel visits Poland today amid signs of a possible thaw in frosty Berlin-Warsaw ties. Merkel needs the backing of Poland’s government to agree EU reforms in March for the 60th anniversary of the founding Rome Treaty.

German Chancellor Angela Merkel address a news conference in Berlin, Germany, January 30, 2017. REUTERS/Fabrizio Bensch

At the same time, Britain’s decision to leave the EU deprives Poland of a strategic ally within the bloc, while the election of Donald Trump as U.S. President raises questions over the West’s relationship with Russia.

The high-point of the visit is a rare meeting between Merkel and Law and Justice party (PiS) leader Jaroslaw Kaczynski, who holds no government posts but is widely seen as the country’s main decision-maker.

More diplomatic discomfort may be in the offing between London and Washington after the speaker of Britain’s lower house of parliament said he would not support any plans for U.S. President Donald Trump to address parliament during a state visit planned for later this year.

Although John Bercow was given a rare round of applause (mostly by opposition deputies), it is not clear that he can block Trump’s entry to all parts of parliament and the Lords upper house could still allow him to come. To what extent Trump sees this as a snub is also a moot point at this stage -- he may be happier with a round of golf at Balmoral.

About 25,000 people gathered in front of government offices in central Bucharest on Monday evening - far fewer than the 250,000 seen the previous evening - to demand Prime Minister Sorin Grindeanu’s resignation and snap elections.

It is not surprising that the numbers on the streets should go down after one week of massive protests that forced a government climb-down over a decree widely seen as reversing anti-graft efforts. Yet the barely one-month-old government still faces an uphill task in restoring shattered public confidence after the showdown.

President Klaus Iohannis, who himself briefly joined an anti-graft rally in late January and has since called a referendum over anti-corruption reforms, is due to address parliament at 1000 GMT on Tuesday.

Leader of the ruling party PiS Jaroslaw Kaczynski, deputy speaker Ryszard Terlecki and Interior Minister Mariusz Blaszczak, applaud after opposition party members leave the podium at the plenary hall in the Parliament in Warsaw, Poland January 12, 2017. REUTERS/Kacper Pempel


French electoral angst has become pervasive now as markets enter a three-month vigil to May 7’s final round of the Presidential vote and many more financial contracts come onto the radar. French and other euro zone sovereign debt spreads are on the rise again – with 10-year nominal French government yields at their highest in almost 18 months on Monday and the OAT/bund spread at its widest in four years.

Equivalent Italian spreads are at their widest in almost three years and Portugal’s demands the highest premium since 2013. Strikingly on Monday, this was not just underperformance in a bad environment for bonds in general.

There was a clear bid for bunds that saw nominal German debt yields fall despite pretty robust German economic numbers and despite German opinion polls showing the centre-left Social Democrats edging ahead of Chancellor Merkel’s conservatives in the build up to this year’s general election. The 10-year bund yield fell back further to a 2-week low of 0.35 pct this morning, partly weighed down by German industry output figures showing a surprising 3 pct drop for December and dampening the unexpectedly strong orders data out yesterday.

But an apparent ‘safety’ bid is clearly playing out elsewhere, with US Treasury yields falling, the yen outperforming despite renewed dollar strength against the euro, and even gold up at its highest since mid-November. Apart from reaching the three-month starting gun on the French result, there were several new twists to that campaign to keep investors on edge.

Although new French Presidential favourite Macron is widely seen as trouncing far-right, anti-euro contender Marine Le Pen in a second round vote, socialist candidate Hamon is still only within five points of Macron in polling around the first round vote and he may be less comfortable in a run-off with Le Pen. Conservative Fillon’s decision to remain in the race despite a scandal over securing a publicly-funded job for his wife, may complicate first-round voting further. The National Front leader, meantime, restated her pledge to take France out of the euro at a manifesto launch the weekend, a move S&P credit ratings firm has said would constitute a sovereign default.

The general global markets mood has turned flat too in a heavy earnings weeks on both sides of the Atlantic. Wall St stocks ended lower, the ViX ticked back above 11 pct, crude oil prices slipped sharply and Asia bourses generally fell back too. Australia’s central bank left interest rates unchanged and India’s monetary policy decision is still awaited today. So too is the release of Chinese foreign currency reserves data for January, where the consensus is for decline to the $3 trillion milestone – a reading below that might spark some anxiety about the ongoing scale of capital flight.

The IMF’s latest reading on Greece’s budgetary targets stuck with a majority view that existing settings were appropriate, but there were splits within the board and a renewed call to look at more forms of debt relief. European stocks are expected to slip lower again, after being rattled by both the bond market scare on Monday and more generalized earnings and banking worries. Italian bank stocks led pan-European bourses lower on jitters about the start of Unicredit’s long-awaited 14 billion euro cash call. BNP Paribas reported an earnings miss this morning, but upped its dividend.

Editing by Andrew Heavens

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