October 16, 2018 / 7:31 AM / a month ago

Daily Briefing: Brexit - May's waiting game

LONDON (Reuters) - British PM Theresa May’s cabinet meets today with the all-too-familiar Brexit cloud hanging over it.

Prime Minister Theresa May attends a meeting at a charity working to combat loneliness, in London, October 15, 2018

Whether deliberate or not on her part, the impasse over the Irish backstop means ministers will not have any draft deal with the EU to examine - and reject. Her hard Brexit colleagues will therefore, for now at least, keep their resignation letters in their pockets.

This week’s EU summit will accordingly be mostly about deciding whether there has been enough progress in talks to make it worth holding a special Brexit summit in November.

EU President Donald Tusk and Germany's Angela Merkel both insist that everyone keep pushing. Even as fears of "no deal" cause sterling again to shed some value, a Reuters poll of economists suggests City observers still see some kind of an accord as the most likely outcome, with the chances of a disorderly Brexit rated at one in four.

"The idea that this budget can blow up Europe is totally unfounded"

In the end, the Italian cabinet managed last night to overcome some internal differences and sign off on an expansionary 2019 budget that boosts welfare spending, cuts the retirement age and hikes the deficit in a showdown with Brussels over EU deficit rules. The European Commission will now assess the fiscal framework over two weeks, and could dismiss it and ask Rome to draw up a new one.

The EU executive has never taken this step since it was given beefed-up powers in 2013. Meanwhile Italian government bond yields have narrowed the spread over German peers after Economy Ministry Giovanni Tria said he was confident he could explain Italy’s plans to the European Union.

With signs that tensions over global trade are gnawing away at the euro zone economy, the latest survey on German investor morale due from the ZEW research institute this morning will be watched closely. Analysts expect the indicator to edge down slightly.

MARKETS AT 0655 GMT

Even though world markets have calmed somewhat after the wild swings of last week, downward pressure persists and even the still-robust incoming Q3 U.S. earnings are doing little to ease end-of-cycle nerves.

Wall St equity indices ended in the red overnight and China’s main bourses did likewise again early on Tuesday, with benchmarks in both losing about 0.6 percent as an annual U.S. Treasury report on countries who may be manipulating currencies for trade gains is due out later in the day. Although China is not expected to be mentioned explicitly, the report is expected to link new U.S. trade deals to commitments on free-floating exchange rates.

Chinese September inflation readings came in largely as expected, easing on a producer level but with consumer price growth picking up a touch. The dollar and U.S. Treasury yields were slightly firmer across the board, with a retreat of Japan’s yen helping the Nikkei rebound more than 1 percent. European and U.S. stock futures were flat to higher.

Wall St stocks suffered a late, tech-led selloff on Monday amid persistent worries that the escalating trade war between Washington and Beijing will start to reflect in earnings guidance from the big tech and industrial stocks during the current reporting season. Alongside Goldman and Morgan Stanley, Q3s from IBM, eBay and Johnson & Johnson are due out later today.

This week’s tension between Saudi Arabia and Western countries over the disappearance this month of a dissident journalist in the kingdom’s Istanbul consulate eased somewhat overnight amid reports indicating Riyadh will say that Washington Post columnist Khashoggi died in a botched interrogation.

World markets had been jarred by the standoff amid concerns any Western sanctions on the Kingdom would be met with financial retaliation by the Saudis – threatening billions of dollars in Western equities and the country’s cooperation in maintaining global oil supplies just as Washington imposes sanctions on Iran.

After a rebound of the country’s main stock index on Monday, Saudi’s riyal rebounded from two-year lows in the spot and forward foreign exchange markets on Tuesday amid the reports of Riyadh’s likely acknowledgement of the death.

The New York Times, citing a person familiar with the Saudi plans, reported the crown prince had approved an interrogation or rendition of Khashoggi back to Saudi Arabia. The Saudi government, it said, would shield the prince by blaming an intelligence official for the bungled operation. Brent crude oil prices were steady, holding above $80 after dipping briefly below that threshold late last week.

In Europe, Italian government bond yields and debt spreads fell as the government in Rome signed off on its deficit-boosting budget plan and passed it on to the European Commission for approval.

Italian Economy Minister Tria said he was confident he could explain the expansionary budget plans to the EU. Sterling was steady ahead of this week’s European Union summit on Brexit, with a draft agreement still elusive due to disagreements over how to manage post-Brexit trade across the Irish border.

U.S. Secretary of State Mike Pompeo walks with Saudi Foreign Minister Adel al-Jubeir after arriving in Riyadh, Saudi Arabia, October 16, 2018

Lack of agreement this week would push the issue into December’s summit, or possibly an emergency summit next month. And even then support for any deal within the UK parliament is uncertain and the chances of another snap general election have risen.

The potential for sterling volatility around the headlines is high and has put traders off any big directional bets on the pound. UK jobless and earnings data later in the day will be watched closely, as will Germany’s October ZEW investor confidence readings.

— 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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