June 26, 2018 / 7:35 AM / 2 months ago

Daily Briefing: Politics and borders - from Trump to Brexit

LONDON (Reuters) - Much of Western politics these days is about borders - and they are increasingly closed ones. The only issue rivalling the immigration rows that simmer on both sides of the Atlantic is a rise in protectionism.

A biker rides his Harley-Davidson during a parade in Hamburg, Germany, June 24, 2018

Harley-Davidson's decision to shift some of its production out of the United States to avoid retaliatory EU tariffs is an early victory for the European response to Donald Trump's steel and aluminium tariffs. But Europe still has to determine where it would strike if Trump goes ahead with a threat to crack down on European auto imports - that would take the standoff to a whole new level.

Then there is Brexit. BMW has now become the latest European group to warn that it would close plants in the UK if Brexit were to disrupt the minutely-timed supply chain on which the auto industry depends. That came after Siemens and Airbus delivered similar messages, to the annoyance of Theresa May's government.

Worse, uncertainty over Brexit has already halved new investment in the British car industry because May's current plans for post-Brexit trade are considered unrealistic, the big SMMT industry lobby said this morning. "There is growing frustration in global boardrooms at the slow pace of negotiations," says SMMT chief Mike Hawes.

A challenge of a different kind presents itself to EU countries today. They must decide what to do with Poland, whose right-wing government wants to enact legal reforms which Brussels says will put the judiciary under political control - in full frontal defiance of the EU’s core democratic values.

This has been coming to a head for a while now, and the snag is that any attempt to sanction Warsaw would get voted down by like-minded governments such as Viktor Orban's in Budapest. But if the bloc cannot enforce its most basic rules, it is in trouble.

Britain's Prime Minister Theresa May welcomes Donald Tusk, President of the European Council, to 10 Downing Street in London, June 25, 2018

MARKETS AT 0655 GMT

Wall St’s worst day in more than two months keeps global stock markets on the backfoot, showing Washington’s trade war hitting home as well as its intended adversaries and also showing the supercharged technology sector is not immune.

U.S. Treasury Secretary Mnuchin’s broadside against all countries and companies threatening U.S. intellectual property was seen as an escalation that drew more than Chinese technology into the fray. And the symbolism of Harley-Davidson planning to move production to Europe as a result of retaliatory European Union tariffs reveals some of the contradictions of the ‘America First’ campaign and whether anyone can actually ‘win’ a trade war.

Harley’s stock dropped 6 percent and financial markets now have to wonder how many tariff and trade assessments will lead to profit warnings over the coming weeks and months. On top of Washington’s protectionism and its reactions, business warnings on the impact of Brexit have also stepped up a gear and auto firms on Tuesday again indicated they may have to shift production away from the UK in the absence of a new customs arrangement with the EU.

Overall, however, the heavy equity market selling has calmed a bit after Monday’s shakeout. Shanghai stocks continued to bear the brunt and lost another 1 percent, as jitters about the weakening yuan – itself likely a deliberate offset to U.S. tariffs – added to the uncertainty and the onshore yuan rate hit its lowest level of the year.

Goldman Sachs reckon a weakening of the yuan by 0.5 percent will increase Chinese GDP growth by 0.4% and may more palatable to Beijing than selling U.S. Treasuries in a response to escalating trade conflicts. But it was calmer elsewhere.

Tokyo stocks were little changed and HK and Seoul benchmarks were down only modestly.  European and U.S. stock futures were marginally in the black. U.S. Treasury yields and the 2-10 year yield curve nudged back up a touch, helping the dollar catch a bid more broadly.

Oil prices were steady after all the OPEC-related developments left Brent crude stuck in the mid-$70s per barrel.

— 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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