July 31, 2019 / 7:36 AM / 4 months ago

Daily Briefing: Eurozone data seen building case for ECB easing

LONDON (Reuters) - Annual inflation to July in the eurozone due out this morning is seen falling to 1.1% from 1.3% previously, an outcome that would give the ECB more room to add stimulus - the more so if GDP growth, which comes out at the same time, also falls as expected.

File photo: A worker at the El Corte Ingles' supermarket pushes a shopping cart in Madrid. REUTERS/Sergio Perez

After yesterday's lacklustre read-outs on the German and French economy - and with wide expectations of a US Federal Reserve easing later today - the case for Mario Draghi to act by September is becoming insuperable.

UK PM Boris Johnson faces perhaps the trickiest leg of his tour of the British isles today when he meets leaders of Northern Ireland's main political parties.

He will call for a restoration of their power-sharing agreement but there are already questions over whether he can act as an honest broker when his government relies for its majority in parliament on the DUP (with whose leaders he dined last night).

It will be no surprise if Johnson today expresses his distaste even more vehemently for the Irish backstop in the EU withdrawal agreement - one of the DUP’s “blood red lines” is that it must go.

As Brexit headlines go, the most significant of the day so far is news that investment in Britain's car sector fell by more than 70 percent in the first half of the year due to concerns about a hard Brexit.

As Germany’s new defence minister and possible future chancellor Annegret Kramp-Karrenbauer meets NATO Secretary-General Jens Stoltenberg today, what US critics regard as Berlin’s lack of commitment to the transatlantic defence body will remain a sore point.

Underlining the divergences of approach between Germany and the United States, Vice Chancellor Olaf Scholz said today he was very sceptical about a request by Washington to join a military mission for the Strait of Hormuz, citing the risk of escalation.

MARKETS AT 0655 GMT

Trump’s trade war and Brexit have been two of the biggest drags on world markets for the past couple of years and continued to rein in assets otherwise buoyed by the promise of central bank easing.

Just as markets await what is now assumed to be a quarter point Federal Reserve rate rise later on Wednesday, President Trump darkened the mood of the re-convened U.S.-China trade talks in Shanghai by saying the Chinese “just don’t come through” on agreements and added than Beijing still had not bought U.S. agricultural produce as promised.

Trump then warned Beijing against trying to stall talks until after next year’s election, saying if they did then there may be ‘no deal’ or a harsher one if he is re-elected. And “no deal” is the phrase of the moment in the Brexit impasse too, with new UK PM Johnson still insisting he will take Britain out of the European Union on Oct 31 unless the EU makes changes to the already-agreed withdrawal deal that Brussels says it refuses to alter.

Johnson visits Northern Ireland on Wednesday, with his pledge to ditch the Irish border “backstop” - the key sticking point between the two sides.

Sterling steadied just above 28-month lows against the dollar first thing Wednesday after a torrid start to the week that’s seen cumulative losses in July of more than 4% amid Johnson’s election and ‘no deal’ fears.

The combination of the two trade tremors shook global equity markets yet again on Tuesday, with Wall St stocks ending in the red overnight despite the looming Fed rate cut and Europe’s STOXX600 recording its worst day since May with a 1.5% selloff.

Apple’s 4.2% rise after the bell on better-than-forecast Q2 earnings and an improved picture for Greater China sales has lifted U.S. futures overnight however and European futures have nudged back up a bit as well.

The mood in Asia was darker, however, with no readout yet from the Shanghai trade talks. Shanghai stocks fell 0.5%, Hong Kong was down 1.3% and Tokyo and Seoul benchmarks were down about 0.7-0.9%. China’s yuan was weaker against a generally firmer dollar.

Despite the lack of a formal readout from the trade talks, the Chinese government’s response to Trump’s accusations was equally rancorous – with the foreign ministry saying on Wednesday that it was Washington that had “flip flopped” on trade promises over the past year.

China’s official manufacturing PMI business sentiment ticked higher in July, but remained in contractionary territory for the third straight month as the trade war continues to bite.

Samsung Q2’s profit drop and gloomy outlook also offset the warm glow in the tech sector from Apple’s results.

Adding to the tension, North Korea fired two short-range ballistic missiles early on Wednesday only days after it launched two similar missiles intended to pressure South Korea and the United States to stop upcoming military drills.

With the Fed awaited, especially its steer on future policy moves after today’s quarter point cut, 10-year Treasury yields held steady about 2.05%.

In Europe, flash July inflation numbers and Q2 GDP for the euro zone will be released later – and are likely to underline the case for further European Central Bank policy stimulus as it effectively promised last week. Germany reported upbeat June retail sales numbers.

In emerging markets, MSCI’s broad EM currency index was steady – with Turkey’s lira continuing to outperform and rising to its highest since April ahead of the central bank’s inflation report later this morning.

With the inflation picture expected to improve, economy minister Albayrak said on Tuesday that further “serious” interest rate cuts were in store.

On the European corporate news front, updates released from Airbus, Puma, Credit Suisse, BNP and Swiss RE looked good, while in global tech the picture looks mixed.

Airbus shares rose 1.9% in early Frankfurt trade after the plane-maker posted stronger-than-expected core second-quarter earnings, led by the switch to efficient new single-aisle jets, and maintained its profit forecast for the year.

The company warned of delivery challenges in the second half and one trader says profit taking could eventually kick in.

Even banks, which face growing profit headwinds from monetary easing, posted solid results.

Credit Suisse was up 2.8% in premarket trade after it posted its highest quarterly earnings in four years, confirming its 2019 profitability target after second-quarter earnings jumped 45%.

BNP Paribas said a strong performance by its corporate and investment banking division had buoyed its profits above expectations during the second quarter.

Shares in France’s largest bank in terms of assets are called up 3% by one trader.

In Spain, BBVA's Q2 net profit rose 2.6% thanks to a stable performance in Mexico and Spain. Still in financials, Swiss RE shares are also rising in premarket after quarterly net income fell much less than expected.

In the consumer space, Puma shares rose 3.3% in early Frankfurt trade after the German sportswear group raised its outlook for sales growth.

L'Oreal posted weaker than expected second-quarter sales growth, in part as demand for make-up products such as its Maybelline mascaras faltered in North America.

According to data from I/B/E/S Refinitiv, European companies are now expected to report a 0.6% rise in second-quarter earnings, a reversal from 0.5% fall estimated a week ago. If that is confirmed, Europe Inc would avoid an earnings recession.

 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.

Editing by Andrew Heavens

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