August 7, 2019 / 7:43 AM / a month ago

Daily Briefing: Let's work together - UK food seeks no-deal waiver

LONDON (Reuters) - Britain's food industry is so worried about the impact of no-deal on supplies that they have asked the government to waive chunks of existing competition law, the BBC reports. That, they argue, would at least allow them to coordinate and direct supplies with each other in such a scenario.

They and others with delicately balanced supply chains are unlikely to derive any assurance from Prime Minister Boris Johnson's insistence to his Japanese counterpart that a smooth transition out of the EU is needed "whatever the circumstances".

Such a blanket assurance may well be founded on the belief of some of his ministers in the viability of "managed no-deal" arrangements mitigating against a hard Brexit’s impact. However that is a plan that, even if workable, would require the buy-in of the EU - which for now has ruled it out as another unacceptable cake-and-eat-it aspiration by Brexiters.

A resumption in the bad news for the German economy: industrial output fell more than expected in June, driven by weaker production of intermediate and capital goods (things that are produced to make other goods). Industrial output dropped by 1.5% on the month - a far steeper drop than the 0.4% decrease that had been forecast, figures released by the Statistics Office showed.

Few societies are as polarised as Poland's as it heads towards an election in October. The ruling PiS party has doubled down on a socially conservative platform, which in particular targets LGBT rights as a threat to traditional Polish culture.

Now the archbishop of Krakow, Marek Jedraszewski, has weighed in, attacking what he calls a “rainbow plague” over-running the country. The use of the disease metaphor is not random and in Poland also harks back to the “red plague” term used by World War Two resistance fighters against Communism. Street protests are expected today.

MARKETS AT 0655 GMT

A 6% wince? After six days of ratcheting up its trade war with China, knocking Wall St stocks some 6% off their record highs, Washington appears to have blinked somewhat – raising questions about just how much financial market heat the White House is willing to absorb in its game of chicken with Beijing.

Traders work on the floor at the New York Stock Exchange, August 6, 2019. REUTERS/Brendan McDermid

The S&P500 bounced more than 1% last night after President Donald Trump and his advisers softened their trade rhetoric, indicating they were still open to hosting trade talks with the Chinese government next month and were not preparing for prolonged tariff war.

Following two days of tit-for-tat over Beijing’s decision to let its yuan slide through the 7 per dollar level for the first time in 11 years, there also appeared to be some attempt by China to steady the currency with reported intervention to mop up dollars by state banks over the past two days.

The whole episode leaves financial markets extremely fragile, however. The overnight rally in Wall St stocks, and retreat in the ViX volatility gauge to just above 20%, was not repeated in Asia. Shanghai and HK stocks were flat, with Tokyo and Seoul benchmarks continuing their decline.

Despite the state bank activity and protestations from the People’s Bank of China that it was not weaponising the currency for trade purposes, the yuan weakened again on Wednesday. The PBOC set its midpoint target rate at a new 11-year low, just a sliver below the 7/$ level. The offshore yuan weakened to 7.076, albeit still off Tuesday’s record weak level near 7.14.

U.S. stock futures ticked lower again first thing. The big concern about the trade war escalation is toll it takes on an already weakening global economy and bond markets as well as other “safe haven” proxies continued to surge on recession fears.

The yield on the 10-year U.S. Treasury bond fell as low as 1.6580% overnight, its lowest since before Trump was elected in 2016. The yield curve inversion seen by many as the harbinger of a 2020 recession deepened further, with the gap between 3 month and 10 year rates negative to the tune of 37 basis points – the most negative since before the crash of 2007/2008.

With bets on a U.S. Federal Reserve interest rate cut of up to 50 basis points next month rising again, the likes of Goldman Sachs see at least two more rate cuts this year and no trade deal between Washington and Beijing until after next year’s U.S. election. Central bank easing around the world continues apace.

"It is easily within the realms of possibility that we might have to use negative interest rates"

New Zealand’s dollar fell to its weakest since 2016 after a bigger-than-expected 50bp interest rate cut from NZ’s Reserve Bank earlier. Australia’s dollar, pricing in further easing there and also acting as a liquid proxy for China’s yuan, fell to its lowest level in more than 10 years.

India’s central bank also cut its main policy interest rate by a surprisingly large 35bp, although the rupee held steady after the news following a sharp slide over the past week on both trade concerns and tensions over Kashmir. Thailand’s central bank also cut interest rates.

In Europe, stocks were expected to tick higher as the earnings season continues to see corporate updates stream in. Economic news remained glum, however, as a slide in German industrial output in June punctured some optimism about an unexpected jump in orders for the same month. More broadly, the dollar’s DXY index was steady after two days of losses, with dollar/yen continuing under pressure just above 106.

Sterling continued to probe two-year lows against the euro, with "no-deal" Brexit angst rising as analysts debate the slim chances of parliament preventing the government crashing out of the European Union on Oct. 31 without an agreement.

Arcane parliamentary procedure and a summer recess means the chances of a no-confidence vote triggering an election before that day are slight, with many now focusing on whether some alternative government of opposition parties could be formed if Prime Minister Boris Johnson lost a confidence vote.

In emerging markets, Turkey’s lira continued to buck the wider EM trend and extended its strong run, firming to its highest against the dollar since April 2. Turkish President Tayyip Erdogan issued a decree boosting the role of the Treasury, enabling it to work on developing the financial sector and take stakes in companies domestically and internationally.

In European corporate news, there's a raft of results from the financial services sector and in general the picture looks a little downbeat. Dutch bank ABN Amro delivered an unexpected 1% rise in Q2 net profit to 693 million euros ($777 million), as interest income rose and impairments on bad loans decreased, but dealers see the shares falling 3-5% due to margin pressures. The tone was equally cautious among rivals.

Italy's biggest bank by assets UniCredit has cut its revenue target for 2019 due to expectations of lower for longer interest rates, while Germany's Commerzbank saw Q2 net profit little changed from a year ago but said its target for a slight increase in full-year net profit had become "significantly more ambitious".

In contrast, shares in payments company Wirecard are being buoyed in early deals after raising its 2019 outlook after reporting new client wins, including Germany's Aldi supermarket chains, as it reported a 35.6% gain in core profits in the second quarter.

Chemicals M&A may provide some spark to proceedings. German chemical groups Bayer and Lanxess are getting a boost in early deals after agreeing to sell their chemical park operator Currenta to Macquarie Infrastructure and Real Assets (MIRA) for an enterprise value of 3.5 billion euros ($3.9 billion).

A report that DuPont is considering a sale of its nutrition and biosciences unit, which supplies everything from soy-based food ingredients to tablet binders, may stir speculation about potential bidders. Other industrial materials companies include DSM, Kerry Group and Givaudan.

Swiss drug company Novartis shares are expected to take a hit - seen down 2% - from news that U.S. drug and food watchdog said some data from early testing of its more than $2 million gene therapy Zolgensma was manipulated, although the agency believes the treatment should remain on the market.

Glencore shares could fall as much as 5% after its results. UK miners may get knocked by weaker metal and iron ore prices amid worries about damage to demand from China, the world's top consumer of industrial materials, due to the trade dispute.

— 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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