July 25, 2018 / 7:40 AM / 3 months ago

Daily Briefing: A tale of two Brexits

LONDON (Reuters) - So it’s not just the politicians that are divided over Brexit ... Britain's banking industry will emerge largely unscathed from Brexit and retain its position as one of the world's top two financial centres for the foreseeable future, John McFarlane, Chairman of Barclays, has told Reuters.

FILE PHOTO: A Barclays sign is seen outside a branch of the bank in London

And that the day after the leader of the City of London, Catherine McGuinness, said Brexit would cost Britain anywhere from 3,500 to 12,000 financial services jobs in the short-term. Further out, the losses could be even greater, she said.

But McFarlane predicts no terminal damage to London’s position. Meanwhile, banks opening bases in the European Union ahead of Brexit are having to show British regulators how they will build up the hubs over coming years to avoid ending up with empty shells.

And in a sign of the difficulties Prime Minister Theresa May faces getting the EU divorce settlement she thinks the UK deserves, Germany, has signalled that Britain would have to move its negotiating position if it hopes to avoid a disorderly or ‘hard’ Brexit next March.

German Foreign Minister Heiko Maas said that included on the land border between EU member Ireland and British administered Northern Ireland, an issue so fraught it could bring down May's government.

 MARKETS AT 0725 GMT

Buoyant U.S. earnings, the promise of more stimulus in China and President Trump’s offer of $12 billion aid to U.S. farmers have propelled world stocks back to five-week highs after Wall Street closed at the highest since early-Feb on Tuesday.

The momentum has stalled somewhat though, as investors wait for fresh developments on the Chinese front and more importantly, on trade, as European Commission President Juncker is to meet Trump today. 

The EU has already said it won’t negotiate “with a gun to our head” so, given Trump’s blustering style, the starting point isn’t that great. Trade commissioner Malmstrom has said too that the EU is preparing tariffs on $20 billion of US goods should talks fail.

But the EU budget commissioner Oettinger has suggested in a more conciliatory note the EU would be prepared to discuss mutual tariff cuts provided  the U.S. first drops levies on aluminium and steel.

On the other market-moving issue of the week – Japanese policy – things too seem calmer. A Reuters story on Monday moved Japanese bond yields to 6-month highs and drove an unprecedented 10 basis point steepening in the Japanese curve, with spill-over to the euro zone and Treasury market.

But the moves have stabilised and today’s Bank of Japan market operations went off without any hint that something could change at the July 31 policy meeting.  Bond yields in the euro zone and the U.S. have eased after the recent rise.

Flags for U.S. President Donald Trump's 'Keep America Great!' 2020 re-election campaign are seen at Jiahao flag factory in Fuyang, Anhui province, China, July 24, 2018

The Nikkei is up half a percent while mainland Chinese shares are flat but Asian tech shares continue to trade strongly following Google’s blowout results on Monday. Hong Kong is up almost one percent.

On the data front today, there is the German Ifo business confidence and U.S. new home sales. German PMI bounced yesterday so we might well see a rise in the Ifo too, given the trade war hasn’t really gotten going yet.

Wall Street futures are a touch lower. On the earnings front, another Faang reports today – Facebook – and more big guns will post Q2 results including Boeing, General Motors, Coca Cola and T Rowe Price.

Currency markets are barely moved amid apprehension over the Juncker-Trump talks but sterling is firmer at one-week highs following yesterday’s 0.3 percent gain triggered as the dollar slipped and PM Theresa May announced she was pushing aside arch-Brexiter Dominic Raab as Brexit negotiator and taking over EU talks herself. The Turkish lira has bounced 0.5 percent after falling 3 percent on Tuesday.

European stocks looked vulnerable to profit-taking after a surge in mining shares took the pan-European index to five-week highs in the previous session. But markets have opened marginally higher. In one of the busiest days of this second-quarter earnings season investors have plenty to get their teeth into.

Deutsche Bank results are unlikely to deliver strong share price moves after the rare good news for the stock was pre-released last week.  LVMH, which reported strong results and no material impact from trade tensions, could deliver a welcome boost to the luxury sector seen as vulnerable to rising protectionism.  The stock was seen rising 1 to 2 percent. (UBS analysts on Tuesday said the sector, highly exposed to China and the U.S., risks falling as much as 30 percent in a full-blown trade war).

One company hit by trade war fears, however, was Deutsche Bank asset management arm DWS, which cut its 2018 inflows guidance, citing market volatility caused by rising trade tensions. Its shares were seen falling 2 to 5 percent.  Chipmaker STMicro followed up on peer AMS’ strong results with an upbeat sales growth forecast for the third quarter.

The tech sector could also get a boost from M&A news in the semiconductor space with sources saying Chinese chipmaker Tsinghua Unigroup has signed a deal to buy unlisted French chip components maker Linxens for $2.6 billion.

In other dealmaking news, a report that Chinese conglomerate Fosun International is considering a bid for Belgian insurer Ageas has moved Aegeas shares up 5 percent at open. 

TV stocks were also likely movers. Britain’s ITV is down almost 1 percent due to a cautious outlook despite reporting a first half boosted by the World Cup and “Love Island”. France’s TF1 meanwhile has opened 4 percent higher after results.

Emerging stocks are up near one month highs, thanks to Asian tech and the promise of Chinese stimulus. The yuan has bounced a quarter percent off one-year lows hit yesterday after authorities pledged company tax cuts.

The lira has bounced after a 3 percent fall triggered by the central bank’s decision to keep interest rates on hold instead of raising them. The wide ranging selloff in Turkish assets is likely to resume however at the slightest hint of a worsening global backdrop.

Also on the EM front, there is Russia where the rouble slipped yesterday following calls from two Republican Senators to sanction Russian sovereign debt. The market is stable today but perhaps President Putin will comment on the subject after a BRICs summit in Johannesburg.

— A look at the day ahead from EMEA Head of Desk Jon Boyle and deputy EMEA markets editor Sujata Rao. The views expressed are their own —

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