October 30, 2018 / 8:41 AM / 21 days ago

Daily Briefing: Merkel looks to her legacy

LONDON (Reuters) - Fresh from the surprise announcement of her planned departure yesterday, Germany's Angela Merkel grapples with what could become a key part of her legacy today.

German Chancellor Angela Merkel welcomes South Africa's President Cyril Ramaphosa at the Chancellery in Berlin, October 29, 2018
"“I have the firm feeling that today the time has come to open a new chapter"

She has invited African leaders to Berlin to forge ahead with what has been described a “Marshall Plan” for Africa, intended to boost private investment in the continent and so pre-empt what her administration sees as the prospect of future mass African migration into Europe. Rwanda’s Paul Kagame, South Africa’s Cyril Ramaphosa and Ethiopia’s Abiy Ahmed will be among the attendees.

While financial markets worry about Italy's expansive budget plans, further west along the Mediterranean Portugal's minority Socialist government is quietly getting its country's finances in order. Today sees the first reading in parliament of the 2019 budget bill, which is designed to cut the deficit to 0.2 percent - the lowest in the country's democratic history five years after it emerged from a debt crisis and bailout.

Moreover, it is managing to do that while giving public-sector workers higher pay, helping families with transport costs and investing more in healthcare. The government’s left-wing allies in parliament are expected to support the bill, which will be subject to amendments before a final vote in November.

Some slightly underwhelming data on the French economy are out this morning, with third-quarter growth up at 0.4 percent but still less than the market consensus, plus consumer spending falling more heavily than expected in September. That comes ahead of the first reading for euro zone growth as a whole in the third quarter this morning, with analysts expecting 0.4 percent on the quarter for 1.8 percent over the year.

MARKETS AT 0655 GMT

The speed with which the brief rally in U.S. stocks faded on Monday gives ample evidence of the new mood on Wall Street, with the latest twist focusing on the Sino-U.S. trade war and reports Washington will impose tariffs on all Chinese imports by the end of the year without progress at next month’s meeting of Presidents Donald Trump and Xi Jinping.

"I think that we will make a great deal with China and it has to be great, because they’ve drained our country"

The S&P 500 ended 0.6 percent lower, its weakest close in almost six months and just shy of a 10 percent drop from last month’s record closing high. Ahead of Apple’s third-quarter earnings on Thursday, tech stocks led the retreat. The Vix volatility gauge probed above 25 percent, although it held below that level first thing on Tuesday.

By contrast, Chinese stocks gained overnight as regulators promised a slew of market-supporting measures and the onshore yuan’s guiding fix was set at its lowest level against the dollar in 10 years. The Shanghai-Shenzhen composite gained more 1 percent, recouping some of Monday’s heavy losses.

Hong Kong stocks were 0.7 percent in red, however. But a firmer dollar and earnings reports helped equity benchmarks in Tokyo and Seoul rise with Shanghai. MSCI’s all-country world index has eked out as little as a 0.04 percent gain for the day so far, with MSCI’s emerging-market benchmark in the red after hitting its lowest level in more than 18 months earlier.

With core U.S. inflation readings coming in ahead of forecast, the equity shakeout has yet to shift expectations of further interest rate rises from the Federal Reserve, and U.S. Treasury yields and the dollar have pushed higher again more broadly this week.

Apart from another hail of earnings in Europe, eyes are also on third-quarter GDP readings from across the euro zone. France has already missed growth estimates, with a sub-forecast 0.4 percent expansion during the quarter. It also registered a much bigger-than-expected 1.7 drop in consumer spending last month.

Italy and overall euro zone GDP releases are due out later. A worrying drop in business sentiment across Europe in recent months has unnerved equity markets across the continent as earnings growth comes in at less than half the pace of U.S. peers, with trade worries exaggerated by political nerves surrounding Italy’s budget standoff and brinkmanship in Brexit negotiations.

Results from BNP Paribas on Tuesday would do nothing to quell investors’ concerns about European banks. Shares in France’s largest-listed bank fell more than 3 percent at the open after it said weakness at its corporate and investment banking arm and at European retail banks drove revenue down – a 5 percent miss against expectations.

A view of the Portuguese parliament in Lisbon during a debate on the 2019 state budget, October 29, 2018

Reports on Monday that China was planning to halve auto sales taxes gave the auto sector some respite on Monday. But the darkening economic clouds are already raising questions about the European Central Bank’s plans to start normalising its monetary policy over the next 12 months. Flash October inflation readings are also due out today and a number of prominent ECB speakers are on the diary.

Sterling was weaker against the euro and dollar after Monday’s UK autumn budget statement loosening fiscal policy slightly – contingent on a Brexit deal - but the budget maths left many doubts about over-optimistic economic growth forecasts for next year. Italian government bonds yields dipped for a second day in a row on Tuesday ahead of a key auction of benchmark five and 10-year bonds.

— 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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