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Daily Briefing: Romania - crisis over, business as usual?
June 28, 2017 / 7:29 AM / in 5 months

Daily Briefing: Romania - crisis over, business as usual?

LONDON (Reuters) - Romania is moving gradually to end the political crisis that led to the former premier being deposed by members of his own party - ostensibly because he backed away from a decree they sought to protect them from graft convictions after massive street protests against the measure.

Economy Minister Mihai Tudose, Romania’s ruling Social Democrats pick to replace the prime minister they ousted last week, talks with media in Bucharest, Romania June 26, 2017. Inquam Photos/Octav Ganea/via

His replacement Mihai Tudose is set to unveil his cabinet today and have his government pass a confidence vote on Thursday before parliament enters a two-month long summer recess. Foreign investors have welcomed the resolution of the stand-off as at least quelling the uncertainty of recent weeks. But if business as usual means there is no incentive for Romania’s political class to mend its ways, is that good for the country in the long term?

Central bankers are very much centre-stage for the region's economy this week, with Mario Draghi notably fuelling market expectations yesterday that the ECB will announce a reduction of stimulus as soon as September. He was careful to add that any tweaking should be gradual, arguing that sizeable monetary support is still needed while adding that the rebound in inflation is not a total given just yet.

Next up is ECB board member Sabine Lautenschlaeger, who is speaking at a panel in Bonn today at 0945 GMT. The German official may well be counted on to be yet more hawkish.

MARKETS AT 0655 GMT

Draghi stole the show while everyone was waiting for Yellen, even though Carney was the only one to match words with action.

The unexpectedly upbeat and slightly hawkish stance of the European Central Bank chief was the big surprise for world markets on a Tuesday packed with central bank signals and speeches. Draghi signalled the bank was considering some adjustment ahead to the ECB’s bond buying programme, which along with the parallel programme in Japan and the UK has more than offset the effects of U.S. Federal Reserve tightening over the past 18 months and kept world asset prices buoyant.

The most immediate market fallout from Draghi’s comments was a surge in the euro and European debt yields. Euro/dollar hit its highest level in a year at $1.1379 overnight, with Germany’s 10-year bund yield more than doubling since - and is now up 16 basis points since the ECB chief spoke. Ten-year Treasury yields moved higher in tandem, pushing to its highest in almost a month.

The euro/dollar surge has knocked exchange rates over everywhere, pushing euro/sterling to its highest since November, while sinking the dollar index more broadly.

With Fed chief Yellen and many of her deputies also flagging concern about over priced financial assets, much as the Bank for International Settlements had done on Sunday, Wall St stocks also had one of their worst days of the year so far - with the S&P500 losing almost 1 percent.

With Yellen continuing to flag another interest rate rise this year, U.S. equities were further hit by another delay in U.S. President Trump’s healthcare reform bill until after the summer recess. Trump’s continuing struggle to get legislation through congress has forced markets to remove expectations of fiscal stimulus this year.

Downgrading its U.S. growth forecasts for this year and next, even the IMF on Tuesday said it had to remove assumptions of tax cuts and spending increases. Draghi, meantime, has the opportunity to revisit his comments later today in Portugal – if he feels markets have overreacted, then his tone may change. He will also be accompanied by BoJ chief Kuroda, who will be watched very closely for any change of tack along the lines of his ECB counterpart or even an echo of the asset price warnings of Yellen.

BoE chief Carney will also join them after tightening UK banks’ credit ratios on Tuesday in a shot across the bows to what the BoE considers to be excessive growth in some areas of UK household borrowing. While this ‘macroprudential’ tightening speaks to the generalized central bank concerns, many see it as a way Carney himself will argue against pulling the trigger on higher interest rates and this left sterling on the back foot.

Editing by Andrew Heavens

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