December 19, 2018 / 8:27 AM / 6 months ago

Daily Briefing: D-100 - Brexit countdown

LONDON (Reuters) - With 100 days to go before Britain is scheduled to leave the European Union, PM Theresa May goes on tour to convince sceptical political and business leaders in Scotland, Wales and Northern Ireland to support her Brexit deal.

Britain's Prime Minister Theresa May leaves 10 Downing Steet in London, Britain, December 17, 2018. REUTERS/Toby Melville

Back in London, the focus is on the publication of a UK government white paper on immigration that is due to end free movement of EU nationals after Brexit.

Local media reports suggest May swept aside the concerns of some cabinet colleagues to insist on tough visa requirements for unskilled EU workers.

It will also be interesting to see whether the government’s famous target of reducing net immigration to “tens of thousands” - which featured heavily in the Brexit campaign - remains a feature of the paper.

The word out of the Italian government is that it has done a deal with the European Commission on its 2019 budget spending.

Holders of Italian debt are delighted, with the news overnight leading to a surge in demand.

A source in Prime Minister Giuseppe Conte’s office urged caution, saying Rome had only received verbal assurances from Brussels.

He added that a deal was not expected to be formalised until a meeting of EU commissioners later today.

Some interesting policy moves are expected out of Berlin today.

The German cabinet is due to lower the threshold to launch national security probes of stake purchases by non-European entities in German companies.

This is an attempt to fend off unwanted takeovers by cash-rich Chinese investors in strategically important areas and prevent the loss of valuable know-how.

Second, Angela Merkel is expected to pass a law to attract more skilled workers from countries outside the European Union in a bid to fill a record number of job vacancies and stabilize the public pension system.

The move is likely to face loud criticism from the right.


The evaporation by the closing bell of Tuesday’s modest bounce in Wall St stocks was another telling indication of overall market mood as 2019 approaches and the latest Fed interest rate is awaited later today.

The S&P500 ended at a 14-month low overnight, wiping out earlier gains of more than 1 percent as fears of a sharp slowdown in the world economy next year seeped into energy and bond markets and anxiety about a U.S. government shutdown resurfaced as the White House and Congress locked horns over President Trump’s proposed budget bill.

Cowed by the gathering economic storm clouds, Brent crude oil prices plunged below $56 per barrel on Tuesday for the first time since October 2017. Despite the expected Fed rate rise, U.S. 10-year Treasury yields briefly dipped below 2.80 percent overnight for the first time since May amid speculation the Fed will revise down its projected rate rise horizon for next year, anxiety over the economic slowdown and the disinflationary pulse coming from the 35 percent drop in oil prices in little over two months.

Facing almost daily criticism from Trump and his advisers, the Fed will have to tread carefully in its decision making later on Wednesday.

While the consensus expects another quarter-point rate rise with a dovish tilt on 2019 projections, it will be hard for chairman Powell to deliver a more dovish signal than is already priced into futures markets – which are not even fully priced for one rate rise next year, never mind the three the last Fed meeting pencilled in.

There’s also concern that a dramatic change of Fed signalling on the economy could spook financial markets and investors and any big change of interest rate direction now could also raise questions about the central bank’s political independence.

The retreat in U.S. yields, meantime, was matched by a weaker dollar.

With global investors polled by Bank of America Merrill Lynch this month putting long dollar positions as the “most crowded trade”, the supercharged U.S. currency has been ebbing into year-end.

The DXY index slipped, euro/dollar is nudging back above $1.14 and dollar/yen slipped to its lowest since October overnight.

Asia bourses continued to push lower on Wednesday, with Shanghai down more than 1 percent and Japan’s Nikkei down 0.6 percent.

Below-forecast Japanese exports, which saw export volumes down 1.9 percent year-on-year last month, were another indication of how the Sino-U.S. trade war is dragging on the world economy.

U.S. and European stock futures steadied slightly in positive territory ahead of the European open.

The biggest early mover was the drop in Italian government bond yields as Italian PM Conte indicated a compromise with Brussels on the country’s controversial 2019 budget had been reached.

The Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie

Italian 2-year debt premia over Germany fell to their lowest since May and the 10-year spread fell to its lowest since Sept.

Sterling held reasonably firm again on Wednesday despite the ongoing Brexit impasse and the UK government’s attempts at brinkmanship by ramping up preparations for a ‘no deal’ Brexit that a majority of parliament is likely against. UK inflation numbers due out later will be watched closely.

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. 

Editing by Andrew Heavens

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