LONDON (Reuters) - G7 finance ministers meeting today in the French city of Chantilly, known for its lace and whipped cream, must deal with the altogether drier problems of regulating tech companies and crypto currencies.
France, the meeting host, has been at the vanguard of efforts to ensure tech companies’ profits get fully taxed and took the unilateral decision last week to impose a 3% levy on the revenue from digital services earned in France. That triggered a U.S. investigation that could result in the United States imposing new tariffs of its own.
Against that backdrop, G7 ministers will try and agree on at least the principle of a minimum tax rate on all corporate profits. A further snag is that the UK and Canada, both of whom will have new governments soon, are holding out. Another priority for the meeting is to examine and contain the risks posed by new currencies such as Facebook's Libra.
UK inflation fell back to the Bank of England’s 2% target in May and some economists think June data, due this morning, will show it dipped further as retailers cut prices to win over cautious consumers.
If true, that augurs darkly for overall demand in the economy and will add to the gloom emerging from business, where successive surveys point to a wariness about making further investments with Brexit uncertainties abounding.
Ursula von der Leyen won confirmation as European Commission chief from the European Parliament last night with 383 votes, just nine more than required and well short of the 400-vote tally that would have signalled a comfortable victory.
That said, she is in her post now and her credibility will depend more on her first actions as top commissioner than any lingering doubts about her mandate. What the vote does show, however, is just how fragmented the European Parliament is - something that could be a headache for European Union policy-making, given the assembly’s power to block and amend legislation.
MARKETS AT 0655 GMT
With eyes drifting to a meeting of G7 finance chiefs in France later today, world markets are caught in a quandary of betting on U.S. and other central bank easing while incoming economic soundings are beating forecasts.
The stock market mood has been weighed down by U.S. President Donald Trump’s continued sabre rattling over trade with China and his insistence on Tuesday that higher tariffs on more than $300 billion of Chinese goods were still possible. Wall Street indices ended lower overnight and Asia’s major markets followed suit earlier today.
Despite the trade row, impressive U.S. retail sales readings for June and even above-forecast manufacturing gains added to similarly surprising strength from Chinese retail and industrial sectors earlier in the week and painted a more benign picture of the world economy at midyear than many had bet on.
However, interest rate futures markets have stuck doggedly to their expectations of a quarter-point Fed rate cut later this month, with one chance in four of a 50-basis-point move still in prices.
Fed Chair Jerome Powell’s speech late yesterday did little to dissuade them, and Chicago Fed President Charles Evans said on Tuesday he felt cuts of 50 bps may be warranted by the end of the year, though not necessarily in July.
Markets are still pencilling in cuts totalling 75 bps. While 10-year US Treasury yields have held around 2.11% over recent sessions, the relatively upbeat economic readings and perhaps some rethinking of the Fed’s longer-term view continue to buoy the dollar, with the DXY index up for a third day.
Both candidates Boris Johnson and Jeremy Hunt now appear willing to contemplate a no-deal exit around Halloween, even though newly confirmed European Commission President Ursula Von Der Leyen said on Tuesday that she would be willing to accept another extension beyond the latest Oct. 31 deadline.
Despite upbeat wage data from May, economic numbers showed slowing momentum in UK job creation and the whole picture conspired to send the pound below $1.24 for the first time in more than two years.
With sterling also falling to its lowest in six months against the euro, the pound continued to weaken first thing on Wednesday and hit low of $1.2380 – its weakest since April 10. 2017. UK inflation numbers for June are due out later. Euro/dollar was also under pressure, partly from Brexit concerns and dipped below $1.12 first thing.
The G7 finance meeting later on Wednesday will be watched less for some agreement on world currencies and more for further U.S. complaints about what it sees as Europe, China and Japan’s competitive devaluations against the dollar. There may be some agreement on a collective response to crypto currencies and Facebook’s plans to issue its Libra “stablecoin”.
The United States, UK, Germany and France have all publicly stated opposition to Libra’s development and urged greater scrutiny of the crypto-currency world for criminal activity and terror financing. Bitcoin fell back below $10,000 on Tuesday and remained about $9,500 first thing.
Elsewhere, the focus continued on the unfolding earnings season. Like Citigroup the day before, JPMorgan and Goldman Sachs results on Tuesday beat headline forecasts but also flagged concerns about net interest income as interest rates look to head lower again. Bank of America and Bank of New York Mellon are out later, with Netflix, IBM and eBay reporting as well.
In corporate news, Elliott continues to splash the cash in Europe, announcing it has built a stake of more than 5% in Saga, the travel and services company catering for people over 50, which has struggled to shake off its image as only serving "old people".
Its chief executive left in June. The shares could rise as much as 10%, according to one dealer. The news will stir hopes of a management shake-up, another trader says.
Based on SAP and Bayer shares after the activist shareholder disclosed stakes in the German companies in recent months, it could be an explosive day for the shares, which are down more than 80% from their 2016 peaks. (Bayer had its best day in a decade a few weeks ago and SAP shot to record highs in April).
There’s plenty of earnings to digest. It’s a mixed picture in tech stocks and a generally downbeat one for the industrial sector, underscoring worries about slowing manufacturing demand.
Dialog Semiconductor shares are up 2% in early trade after the chip maker forecast higher-than-expected second-quarter profits, while traders are calling semiconductor equipment maker ASML down 1% to 2% after its trading update -- the second quarter beat expectations, but dealers are focusing on the softer third-quarter guidance.
Brenntag has cut its fiscal-year outlook, the latest chemicals company to warn of slowing demand after BASF's alert last week. SKF, the world's largest maker of industrial bearings, which competes with Germany's Schaeffle, has cautioned that demand is slowing. Brenntag shares are down 5% in pre-market Frankfurt trade.
In London, BHP Billiton shares are expected to rise, following its shares listing in Australia after its results. Fresnillo shares are seen falling 3% after the mining company cut its fiscal-year gold and silver output targets.
— 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 —