February 14, 2017 / 8:21 AM / a year ago

Daily Briefing: U.S.-Russia reset - doubts grow

LONDON (Reuters) - The resignation of Donald Trump’s national security adviser, Michael Flynn, over his contacts with Russia before the U.S. president’s inauguration will further dampen hopes in Moscow of a genuine “reset” of U.S.-Russia ties.

Flynn was under mounting pressure to quit after revelations he had discussed U.S. sanctions on Russia with the Russian ambassador to the United States before Trump took office and then misled Vice President Mike Pence about the conversations. One senior Russian lawmaker has already issued a statement suggesting Flynn’s departure showed Trump’s administration had been “infected” by anti-Russian feeling. The Kremlin itself may also react later.

It’s a potentially crunch week for Greece ahead of Monday’s meeting of euro-zone countries to keep its bailout on track and ensure against a default this summer. Jeroen Dijsselbloem, head of the Eurogroup club of euro-zone finance ministers goes before the European Parliament to discuss progress at 1400 GMT today, while in Athens Greek farmers are protesting for tax cuts and more subsidies.

Lenders’ envoys meanwhile head to Athens this week to assess progress in putting through reforms agreed as part of the bailout. With Dutch and French elections adding to the political complexity, it is all raising fears of a re-run of mid-2015 when Greece teetered on the verge of falling out of the euro zone.

German flash GDP came in at a seasonally adjusted 0.4 percent in Q4, just under expectations, with authorities saying growth was held back by a weaker trading environment. That said, the overall growth rate for 2016 was confirmed at 1.9 percent, which was the strongest rate for half a decade. Euro zone flash Q4 growth is due at 1000 GMT, with expectations of 0.5 percent on the quarter and 1.8 percent year-on-year.

Whatever else might be going on in the White House, investors are putting their faith in Trump. At least equity investors are. After the Dow’s recent break above 20,000 points, the S&P 500 on Monday broke above $20 trillion in market cap for the first time ever. All three benchmark U.S. indexes closed at new record highs as investors bet on Trump delivering a package of tax cuts, spending and deregulation that they believe will lift growth and corporate profits.

Financial stocks, in particular, are on a tear. They’re up 20 percent since the Nov. 8 election - Wall Street is up 11 percent - and Goldman Sachs shares are up 35 percent. The focus now shifts from the fiscal to the monetary, and Fed chair Janet Yellen’s semi-annual testimony on policy today and Wednesday. All eyes are on how many rate hikes this year she signals. Maybe three? Or two, as market pricing implies?

One thing investors will be watching is how forceful she is in keeping alive the risk of a hike in March, something the market has priced as a distant chance. European futures point to a lower open on Tuesday, perhaps reflecting a sense of caution creeping in ahead of Yellen’s testimony. Some profit taking would be expected though, as European stocks are on a six-day winning streak.  

Upcoming data/events/themes for market reports on Tuesday

Editing by Louise Ireland

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