June 27, 2018 / 7:33 AM / 20 days ago

Daily Briefing: Bavarian drumbeat grows louder

LONDON (Reuters) - Angela Merkel’s Bavarian allies are insisting this morning they want to unilaterally re-impose border controls from next week in contravention of EU rules, upping the pressure on Merkel to secure an agreement on new migration arrangements with other EU nations at a Brussels summit starting tomorrow.

German Chancellor Angela Merkel talks to parliamentary group leader of the ruling CDU/CSU faction Volker Kauder during a meeting in Berlin, June 26, 2018

So far, the chances of that don't look good, suggesting that her coalition is on the verge of collapse; a rather bewildered leader of the centre-left SPD, the third party in the coalition, is even saying she doesn't know whether the party should have to start preparing for new elections.

The alternative interpretation for all this is that it is classic pre-summit brinkmanship, allowing the Bavarian CSU party to show its voters back home how tough it is, and giving Merkel cover to demand concessions from her EU peers in Brussels and come away with some kind of compromise. If that is the game, it is nonetheless a dangerous one.

In Prague, Czech President Milos Zeman will appoint a new cabinet today following eight months of political instability after last October's largely inconclusive election. It will be an unusual one: it will be headed by Prime Minister Andrej Babis, a billionaire with an empire in everything from farms to media, and it will rely for support on a legacy Communist Party that has already vetoed at least one ministerial appointment.

While Babis declares himself pro-EU and pro-NATO, both the Communists and President Zeman are pro-Russia and pro-China. One thing is clear: it will remain among the EU’s most anti-immigration countries, refusing to take in asylum-seekers who arrive in other EU member states.

On the economic front, the Bank of England publishes at 0830 GMT its regular survey of businesses conducted by its regional agents. The report is monitored by members of the Monetary Policy Committee, and gives details of trends in business investment, pay deals, hiring and price-setting.

MARKETS AT 0655 GMT

Despite a steadying of Wall St stocks overnight, there was little let up in the trade-related slide in China and other Asia markets on Wednesday.

Czech President Milos Zeman arrives for the cabinet's inauguration at Prague Castle, June 27, 2018

Shanghai stocks, now technically in ‘bear market’ territory with losses of more than 20 percent since January’s peak, dropped another 1 percent earlier amid jitters about the effects of U.S. import tariffs, blocks on Chinese investment into U.S. technology firms and the weakening of the yuan as a likely offset to the trade barriers.

China’s central bank lowered its yuan midpoint for the sixth straight trading day to the weakest in six months, reflecting sharp losses in the currency a day earlier amid speculation Beijing would allow currency weakness rather than other financial retaliation to trade threats such as sales of U.S. Treasury bonds and as monetary policy between the two countries moved in opposite directions this month.

The spot yuan rate breached 6.6 per dollar for the first time since December, hitting a high of 6.6159 before steadying – almost 6 percent from the March low.

HK stocks were also down 1 percent, while Tokyo and Seoul were off about 0.3 percent. U.S. futures were also marginally lower, although European equivalents point higher ahead of the open.

Many economists are now poring over possible economic fallout from the trade war escalation via business confidence or market retrenchment. While so far the hard data has held up well and direct trade measures only have a limited impact on GDP estimates, the damage to sentiment is the wild card.

Ten-year U.S. Treasury yields slipped to 2.86 percent overnight, with the 2-to-10-year yield curve slipping to another 11-year low of 33.7 basis points. Oil prices rose after the U.S. pushed countries to ban imports of Iranian oil – offsetting the weekend OPEC agreement to up output. Brent rose close to $77 per barrel for the first time in two weeks, buoying energy stocks somewhat.

In emerging markets Bahrain’s smouldering debt problem burst onto the headlines on Tuesday with major moves in its debt and CDS prices and slippage of dinar forward rates that threatened the county’s exchange rate peg.

But the dinar rebounded sharply against the U.S. dollar in the spot market in early trade after Saudi Arabia, the United Arab Emirates and Kuwait pledged they would support Bahrain financially.

Sterling remained on the backfoot after comments from incoming Bank of England member Haskel on Tuesday indicating he would be a dovish addition to the central bank’s decision-making team.

— 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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