January 30, 2018 / 8:54 AM / 8 months ago

Daily Briefing: Mixed Brexit backdrop as May heads east

LONDON (Reuters) - There are mixed messages on what sort of economic impact Brexit is having as legislation to deliver Britain's departure arrives in the House of Lords upper house of parliament today.

FILE PHOTO: An anti-Brexit protester demonstrates opposite the Houses of Parliament in London, January 16, 2018
There is no mandate for this hard and destructive Brexit. No one voted to make themselves or their families worse off

On the one hand, BuzzFeed has leaked what it says is a UK government analysis concluding that all local industry sectors across the board will be hurt by leaving the European Union - even in the event of a comprehensive free trade deal between the two; on the other, new data shows the confidence of British households rose at the fastest pace in a year in January, suggesting the economy could hold up better than expected again this year.

Such thoughts will be in the back of PM Theresa May's mind as she heads to China for what could be a crucial trade visit.

Hungarian Prime Minister Viktor Orban is due to meet the leaders of Austria's new ruling coalition of conservatives and the far right, who share his hard-line views on immigration and are open to forging closer ties with him in a divided EU.

Chancellor Sebastian Kurz has promised his government will be fundamentally pro-EU, even though he wants it to focus on fewer tasks. Far-right leader Heinz-Christian Strache - his vice-chancellor - has gone further by suggesting Austria should move away from its usual western European allies like Germany by joining the Visegrad group of eastern European states.

Catalonia's parliament gathers today to appoint a new president for the region, with the name of former Catalan president Carles Puigdemont as the candidate. The snag is that Spain's Constitutional Court has ruled that Puigdemont - living in exile in Belgium and facing charges of sedition and rebellion in Spain - could only be sworn in if he were physically present in the parliament.

MARKETS

World stocks have pulled back for the second day in a row, weighed down by several factors – for one, the bond selloff has been gathering steam with US 10-year yields hitting new 3-1/2 year highs earlier today in Asia, German 10-year yields hovering just below the 0.7 percent hit yesterday and Japanese yields at the highest since last July.

Second, there was last night’s tech selloff in New York that took Apple shares more than 2.5 percent down at one point on reports that it would halve iPhone production and also concerns of weak iPhone X sales (The company reports for Q4 on Thursday, along with Amazon and Google-owner Alphabet).

Then there is Donald Trump’s State of the union speech tonight and markets are obviously bracing for any unpleasant surprises, especially on trade.

Finally the U.S. Fed meeting kicks off and while no action is expected, hawkish language would make markets re-assess the number of rate hikes expected this year.

So last night’s Wall Street falls, the biggest one-day declines  in five months, have fed into Asia, in particular hitting shares in Apple suppliers across the region. The Nikkei has fallen 1.4 percent to one-month lows while Korea, HK and Taiwan have all lost more than 1 percent.

Two men hold Spanish flags while they walk past the parliament building in Barcelona, January 29, 2018

Still, MSCI’s all-country  world index is on course for a record 15th straight month of gains and clocking the longest winning streak of weekly gains since 1999. What would it take to derail all this? UBS analysts reckon another 35-40 bps rise in  global bond yields will do the trick.

The other story is the dollar, which is being buoyed by rising yields and has jumped 1.3 percent in two days against a basket of currencies.

That’s taken down the euro further from $1.25 while sterling extends its losses by almost half a percent after suffering its biggest one-day fall since November on doubts about a smooth Brexit process, which tempted profit-takers. It has just fallen below $1.40 for the first time in a week.

The stronger dollar has also taken the edge off oil and metals (crude is down 0.7 cent) in turn hurting the commodity currencies such as AUD and ZAR.

A lot to watch out for today in Europe on the data and events front: Q4 euro zone GDP is expected to come in solid around 0.6 percent, plus there is German inflation. For sterling watchers there is BoE’s Mark Carney speaking at 1530 GMT and consumer spending data at 0930 GMT. In Spain, the investiture of the Catalan president could cause some fresh ructions with Madrid and moves on bond markets.

Taking its cue from Wall Street and Asia, Europe’s stock market opened weaker, with the pan-European STOXX600 down half a percent and Germany’s DAX, heavier in tech down 0.7 percent.

Monday’s slide in Apple shares came during European trading hours and weighed on European iPhone suppliers including AMS, Dialog Semiconductor and STMicro, but chipmakers and tech stocks appear to be modestly firmer.

However, investors may be growing skittish about high valuations and the equity ‘melt-up’ with the MSCI World entering its longest ever period without a correction of more than 5 percent. Mining stocks opened 1.6 percent lower.

Europe’s top tech company, SAP, will be a focus after its results came in shy of expectations and it bought a U.S. software firm for $2.4 billion. The stock is down almost 1 percent. Swatch meanwhile is seen rising 3 to 4 percent after impressive guidance and accelerating sales.

In emerging markets, Russian stocks eased to two-week lows after the U.S. Treasury department named major Russian businessmen including the heads of the two biggest banks, metals magnates and the boss of the state gas monopoly on a list of oligarchs close to the Kremlin.

However, the Trump administration said it would not immediately impose additional sanctions on Russia. Norilsk Nickel, Rusal, Severstal and VTB Bank all opened lower, some falling over 1 percent in early trading. The rouble was slightly firmer against the dollar.

Emerging equities fell over 1 percent, set for their biggest one day fall since early December, with Asian markets a sea of red. Investor sentiment was hit by a sell off in Apple shares and a spike in bond yields. Hong Kong, Chinese mainland shares, South Korea, Taiwan and Indonesia all tumbled over 1 percent.

Emerging currencies struggled to make headway in the face of a stronger dollar, with the South African rand and the Mexican peso among the biggest fallers, down 0.3 percent. In South Africa investors are waiting for cash-strapped power utility Eskom to post its financial results. The firm has been embroiled in a governance crisis.

The Hungarian central bank meets today but is expected to keep rates on hold at 0.9 percent. The bank is regarded as one of the most dovish in the world and is employing unconventional easing methods.

Editing by Peter Graff

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