May 7, 2019 / 7:40 AM / 5 months ago

Daily Briefing: Tensions in sight as Pompeo hits Berlin

LONDON (Reuters) - Awkward subjects abound when U.S. Secretary of State Mike Pompeo touches down in Berlin this afternoon.

U.S. Secretary of State Mike Pompeo attends the Arctic Council Ministerial Meeting in Rovaniemi, Finnish Lapland May 7, 2019

Aside from Washington's longstanding anger at Germany's refusal to meet NATO defence spending targets, there is also tension over Berlin's backing for the NordStream 2 pipeline project to carry Russian gas and the possible participation of China's Huawei in building Germany's future 5G telecom network.

Pompeo first has a meeting with Foreign Minister Heiko Maas before talks with Angela Merkel scheduled for 6.00 pm local time (1600 GMT).

Downbeat comments by Labour’s John McDonnell at the weekend about the state of cross-party Brexit talks were enough to send the pound lower yesterday, snuffing out some of the optimism that had surfaced through last week.

The crushing defeat of the ruling Conservatives at last week's local elections and the less-than-stellar performance of Labour was spun by some officials as reinforcing the urgency for a deal.

Yet McDonnell's line that negotiations with Theresa May's Conservatives were like dealing with a company heading into bankruptcy bolstered the theory that Labour would be wary of signing anything under her leadership. The talks are nonetheless due to resume today.

The rift between Hungary's Viktor Orban and the mainstream conservative grouping in the European Parliament is looking more and more definitive after Orban said he could not support the official candidate of the grouping, Germany's Manfred Weber.

That prompted Annegret Kramp-Karrenbauer, leader of Germany’s Christian Democrats, to declare she now assumed Orban would be leaving the group. What is at stake are the dozen or so seats that Orban’s Fidesz party can be expected to win in this month’s European Union elections.

That is not massive in a legislature with some 750 lawmakers, but the mainstream conservatives are already concerned they will bleed support to hard-right populists such as Italy’s Matteo Salvini. The question now is whether a Salvini-Orban alliance of some kind is in the offing.

MARKETS AT 0655 GMT

Breakdown or brinkmanship? The seeming collapse of a U.S.-China trade truce that shocked world markets on Monday continues to reverberate, with London markets returning from a holiday on Monday to trade the news for the first time.

U.S. President Donald Trump’s bombshell that Washington would proceed to raise tariffs on $200 billion of Chinese goods to 25 percent from 10 percent by the end of this week sent Shanghai down more than 5 percent on Monday, its biggest one-day loss in more than three years.

Trading was calmer on Tuesday. Shanghai spent most of the day in the red again, but closed in positive territory. The late rally was helped when China confirmed Vice Premier Liu He would still go to Washington on Thursday and Friday of this week, encouraging speculation that Trump’s move in response to reported backtracking by China on some trade commitments was an attempt to force a deal through by Friday.

Hong Kong closed up 0.5 percent, but Seoul’s Kospi ended almost 1 percent lower. Japan’s Nikkei, returning after a 10-day holiday, was 1.5 percent lower. The S&P500 fell almost half a percent on Monday on the trade jolt, with futures down a further 0.2 percent overnight even if off their worst levels. European stocks reversed early losses to trade flat.

Traders work on the floor at the New York Stock Exchange, May 6, 2019

The dollar was generally weaker, with 10-year Treasury yields back above 2.30 percent after Monday’s drop. Euro/dollar was higher despite another below-forecast German industrial orders gain for March. Despite the general gloom about the euro zone economy, economic surprise indices for the bloc are now at their least negative in eight months.

In emerging markets, Turkey’s lira is back in tailspin. It had plummeted more than 3 percent since early Monday through 6 per dollar after Turkey's election board ruled to annul and re-run, on June 23, Istanbul mayoral elections, which President Tayyip Erdogan’s AK Party had lost.

Challenges by the AKP to the March 31 election result in Istanbul, which showed a narrow victory for the opposition CHP party, have hit the lira in recent weeks. Istanbul, Turkey’s main commercial hub, accounts for a third of the country’s economic activity.

Elsewhere, sterling gained after weekend speculation the ruling UK Conservative and opposition Labour Party may push forward with a Brexit compromise deal after heavy defeats for both parties in local elections last week. The Australian dollar rose after the Reserve Bank of Australia left interest rates unchanged, as expected.

On the European corporate front, the world’s biggest brewer, AB InBev, confirmed reports it is planning a minority listing of its Asian business, but the news was overshadowed by first-quarter earnings, which missed expectations, driving its shares down 1 to 2 percent in pre-market trading.

Shares in carmaker BMW were down 1.5 percent after results showed profit fell 78 percent, hit by a 1.4 billion-euro legal provision and expenses. British security company G4S was expected to fall as much as 10 percent after Garda World Security said it will not make an offer for the company.

Germany's Henkel, which makes Schwarzkopf shampoo and Persil detergent, was expected to fall 2 percent after it reported disappointing earnings and sales as its beauty unit lagged in western Europe and China and its adhesives business was hurt by falling industrial production.

Infineon stuck to its revenue forecast (which has been twice lowered already), reporting flat second-quarter sales. Italy’s Unicredit said it was considering a sale of its FinecoBank unit and had adopted measures to ensure the online broker could operate outside the group.

— 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 —

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