December 19, 2017 / 8:26 AM / in a year

Daily Briefing: Catalonian stalemate; Brexit "end state"

LONDON (Reuters) - Campaigning closes today ahead of Catalonia's regional election on Thursday - an exercise in which some of the key players are either in jail or in exile, and which may not produce a conclusive result despite massive voter turnout.

An illustration shows ballot papers for Catalonia's regional elections against a Catalonian flag in Barcelona, Spain, December 18, 2017. REUTERS/Albert Gea/Illustration
We are democrats before we are separatists

Answering written questions from a prison cell where he is being held for alleged sedition, the leader of the main pro-independence party this week softened his stance on unilateral secession. Polls suggest the outcome could be a regional parliament hung between pro-secession and pro-unity parties; the risk for the region is a gradual economic drift as investors look at this months-long deadlock and conclude it will be prone to uncertainty for years to come.

Austria's new chancellor travels to Brussels this evening on a mission to reassure his hosts that his government will remain pro-EU despite a coalition with eurosceptic far-rightists. Sebastian Kurz has promised his government will be clearly pro-European "and committed to making a positive contribution to the future development of the EU". Yet there are real concerns that Austria will become a new thorn in the side of EU integration, notably resisting efforts to forge common asylum and migration policies. At least one top EU commissioner, Pierre Moscovici, has said he cannot follow the usual protocol and congratulate Kurz on his government's swearing-in.

The presence of the far-right in government is never without consequences

There may be more fireworks from British PM Theresa May's encounter with her cabinet today as she embarks on a discussion of what the "end state" of Brexit might be. It has by now dawned on much of her ruling Conservative Party that foreign minister Boris Johnson's infamous policy on cake (having it and eating it) was pure fantasy, and that future access to the lucrative markets of the world's largest trading bloc will have to be bought with obligations, responsibilities and general rule-following. This is of course deeply unpalatable to those politicians who promised voters that Brexit was all about "taking back control". It is probably too early for a major cabinet bust-up today - but expect growing tensions next year.


 World equities calmed down a touch after Monday’s record breaking surge on Wall St and in the MSCI all-country world index. U.S. Congress is set to vote later on Tuesday on the long awaited U.S. tax cuts and reforms and the bill will likely be signed into law by the end of the week. With Wall St’s Vix volatility gauge set to end the year near historic lows below 10 percent, the lift to global stock markets in general from a mix of brisk world growth combined with a U.S. fiscal stimulus has put the MSCI world index on course for its best year since 2009 – now up more than 21 percent to date in 2017.

Stocks aside, the final throes of the tax cutting saga did little to affect the dollar and U.S. Treasuries. The dollar’s index is down for the second day, though well within trading ranges of the past month or more. Ten-year U.S. Treasuries continue to hover just below 2.40 percent, where they have been for most of the past three weeks. The euro/dollar exchange rate was a touch higher as it bobs back and forth around $1.18. European stocks are expected to open flat.

South Africa’s rand was Monday’s big mover, surging as much as 4 percent against the dollar to nine-month highs at one point in anticipation of Cyril Ramaphosa’s eventual election as leader of the African National Congress - a vote that will dictate the country's future direction as he is now expected to become President after 2019 elections. A former union official turned businessman, Ramaphosa has campaigned on ticket of fighting corruption and revitalising the economy. The rand eased back a bit early on Tuesday, ebbing about 0.4 percent to 12.8150 per dollar, but benchmark South African sovereign bonds continued to rally early on Tuesday.

Elsewhere, trading is starting to slow into year-end holidays and some players are keeping a close eye on a recent tightening of the overseas dollar borrowing markets, which saw short-term cross currency rates jump sharply on Monday only to ease back quickly this morning as seasonal squeezes amplified rising Fed interest rates this month.

Germany’s December Ifo business survey and U.S. November housing starts top the data diary.

 (editing by John Stonestreet)

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