November 14, 2018 / 8:31 AM / a month ago

Daily Briefing: Cabinet cliff-hanger on Brexit

LONDON (Reuters) - The question for Theresa May over the next eight hours or so is whether she has the support of enough of her cabinet ministers to take a draft Brexit deal to a Brussels summit for rubber-stamping in a couple of weeks time.

"For the first time in a thousand years this place, this parliament, will not have a say over the laws that govern this country. It is a quite incredible state of affairs"

There are local media reports that her most senior ministers are already on board while a couple of more junior ones - Esther McVey and Penny Mordaunt - so far are not. That might be enough for May to carry on.

EU sources say the Irish backstop would come in the form of a UK-wide customs arrangement, with specific provisions for Northern Ireland which go deeper on customs and alignment with EU single market rules than for the rest of the United Kingdom.

That suggests earlier talk of a “backstop to the backstop”, in which Northern Ireland alone would have continued to have separate customs arrangements with the EU, has been dropped.

But Brexiteers in parliament will point out how overall the deal could lock the UK into compliance with an array of EU rules for many years to come, without any say in their making.

Even if she gets the deal through cabinet, parliamentary approval is looking much harder - prompting growing talk of either “no deal” or a fresh referendum.

Italy overnight re-submitted its draft budget for next year to the European Commission with the same growth and deficit assumptions as the draft rejected last month for breaking European Union rules, but with falling debt.

Given that EU fiscal rules require highly indebted governments like Italy to cut deficit and debt every year, that is unlikely in itself to keep Brussels happy. It now has the choice between going down the path of slapping unprecedented fines on Rome - a course of action that might please some but could also foster anti-EU sentiment - or seeking compromise.

The German economy contracted for the first time since 2015 in the third quarter as global trade disputes hit exports. Gross domestic product in Europe's biggest economy fell 0.2 percent quarter-on-quarter, more than forecasts for a contraction of 0.1 percent.

Another one-off factor was the fall-out from stricter vehicle emissions tests put into place after the cheating scandals of recent months. That in turn put the brakes on car production, one component in the figures.

MARKETS AT 0755 GMT

The sliding oil price and Brexit-fuelled sterling surge dominated markets on Tuesday and, while off their most extreme levels, both prices resumed that direction first thing today.

Global equity markets remained on the backfoot, however, with market behaviour and psychology since October’s steep falls clearly reverting to selling of rallies more than buying big dips.

China’s latest economic sounding left Shanghai stocks in the red – with above-forecast industrial output numbers for last month offset by disappointing retail figures. Some optimism about backroom trade talks between Washington and Beijing was offset by warnings from U.S. Vice President Pence about a new cold war between the two economic powers.

The dramatic slide in oil prices, where U.S. futures fell for the 13th straight day with losses of more than 7 percent and Brent crude fell below $65 for the first time since March, was exaggerated as OPEC warned of a new glut in oil supplies next year as global demand ebbs. Brent is now down 25 percent in just 30 trading days and the oil price dive has hit energy shares and sovereign bond yields.

"We will look at the details of what has been agreed when they are available. But from what we know of the shambolic handling of these negotiations, this is unlikely to be a good deal for the country"

Sterling held the bulk of Tuesday’s surge against the dollar and euro meantime as news that the text of a Brexit agreement between UK and European Union negotiators had been reached and was being presented to a fractious UK cabinet for approval. UK PM May is expected to convene the full cabinet at 1400 GMT today.

The pound’s gains are amplified by signs of a breakthrough on Brexit and the chance of a special EU summit on the issue later this month, given signs of  a pickup in domestic wage growth and indications from the Bank of England it will tighten monetary policy further if Brexit goes smoothly next year.

Elsewhere, Italy’s bond yields pushed higher again as the government made no changes to its budget deficit and growth targets after demands by the European Commission for it to do so by Tuesday. The Commission now has to decide whether to implement its excessive deficit procedures, that could ultimately lead to big fines on Rome.

The IMF sided with the EU on Tuesday, warning about the debt trajectory leaving Italy’s economy vulnerable to even small shocks and forecasting growth of just 1 percent next year – well below the government’s optimistic 1.5 percent projections. Elsewhere, the dollar and U.S. Treasury yields were steady first thing. U.S. stock futures and European shares were in the red.

In corporate news, a few earnings headlines seem likely to offset the gloom. Salzgitter beat Q3 expectations on higher steel demand. Wirecard hiked its guidance after a jump in net profit. E.ON eyed the upper half of its 2018 outlook.

In the financial sector, Austria's Raiffeisen Q3 profit jumped 29 pct and Prudential's life insurance new business profit rose 17 percent. Less upbeat were Merck's Q3 earnings down on weak Latam currencies.

— 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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