February 28, 2017 / 8:43 AM / a year ago

Daily Briefing: Euro break-up; nerves rising

LONDON (Reuters) - Now France and Italy have joined Greece at the epicentre of concerns about the eurozone: the number of investors expecting the single currency area to lose at least one member state in the coming months has increased, a survey showed on Tuesday, with the risk of contagion now seen as bigger than during the height of the debt crisis in 2012/13.

Frankfurt-based Sentix said its monthly “euro break-up” index, based on a survey of around 1,000 institutional and retail investors, rose to 25.2 percent in February from 21.3 percent in January. This means one out of four investors now believes that at least one euro zone member state will quit the single currency in the next 12 months.

    Meanwhile Scottish First Minister Nicola Sturgeon is upping the rhetoric about a possible second referendum on independence: she is out this morning saying the "sheer intransigence" of the British government could force it. She would have to be certain she could win it this time, and while Brexit may have sharpened the political arguments in favour, the economic ones remain less certain with oil and the local finance sector both fragile.

Some pundits nonetheless speculate Sturgeon could even announce a referendum plan next month after Article 50 is triggered. In any case, the jitters are a drag on sterling.

    Relations between NATO members Germany and Turkey are on edge again. Turkish authorities yesterday arrested a reporter for a prominent German newspaper on charges of propaganda in support of a terrorist organization and inciting the public to violence. Deniz Yucel, a correspondent for the Die Welt newspaper, was initially detained on Feb. 14 after he reported on emails that a leftist hacker collective had purportedly obtained from the private account of Berat Albayrak, Turkey's energy minister and the son-in-law of President Tayyip Erdogan. German Chancellor Angela Merkel has weighed in, criticizing the decision as “bitter and disappointing”.


Details, details. Despite the lack of them, world markets have for more than three months shown remarkable faith in U.S. President Donald Trump delivering on his campaign pledges of tax cutting and infrastructure. But Trump’s Tuesday night congressional address does now look set to roll out some ‘big’ numbers on the latter at least, while tax reform plans may take some time.  Some $54 billion of military spending is now on the table, though that appears to be funded by cuts elsewhere in government.

Led by engineering, construction and defence firms, Wall St stocks eked out another record late Monday, with the Dow Jones recording its 12th straight record – a winning streak not seen since 1987. It has to be stressed that these are all very incremental daily gains and a considerable risk of disappointment must now be building.

What’s more, Fed expectations appear to be turning decidedly more hawkish, with futures markets now putting the chance of another rate rise next month at more than 30 pct. Dallas Fed chief Kaplan said on Monday the Fed may need to move sooner rather than later to avoid slipping behind the curve. All the more surprising then that U.S. Treasury yields, despite a small rebound on Monday, remain so subdued in the face of new fiscal spending plans and rising rate hike expectations. Ten-year Treasury yields are hovering about 2.36 pct, some 10bp down on where they started the year. The dollar also looks stuck for now until it can nail down the next stimulus, with euro/dollar hovering just below $1.06.

Much of the European focus first thing will be on the two-year German debt auction after a month of steep drops in yields there amid QE bottlenecks and political anxiety surrounding the French election. Eyes will also be on Greece as IMF and EU monitors return to Athens on Tuesday for talks on the country’s third sovereign bailout programme. Asia bourses were steady to firmer overnight, with European stocks expected to open marginally higher. Brent crude was steady about $56.

Editing by Robin Pomeroy

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