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Daily Briefing: Europe's east-west split on migrants
September 6, 2017 / 7:29 AM / 16 days ago

Daily Briefing: Europe's east-west split on migrants

Migrants from Ethiopia and Eritrea queue in line during a food distribution near the former "jungle" in Calais, France, August 23, 2017. REUTERS/Pascal Rossignol

LONDON (Reuters) - Europe's top court will rule around 0730 GMT on a challenge by eastern European countries against talking in refugees coming from Africa and the Middle East, a dispute that has divided the bloc. Brussels firmly expects the Luxembourg-based European Court of Justice (ECJ) to throw out a challenge by Slovakia and Hungary, and backed by Poland.

Western EU states, including Germany, say the easterners cannot be exempted from showing solidarity; Italy, which has seen a rise in arrivals to its shores, has called for taking away from the reluctant easterners some of the EU funding they use to catch up with the wealthier West.

Some diplomats even think that a court dismissal of the challenge may ultimately embolden the rest of the EU to force through a new arrangement on distributing refugees against the will of the easterners. That could be a risky step that might only strengthen the hand of the anti-EU lobbies in those countries.

Catalonia's regional parliament is expected today to approve plans to hold a referendum on a split from Spain on Oct. 1, upping the ante in a long-running stand-off with the national government. This move, which formalises their intentions to hold a vote, is likely to be immediately blocked by Madrid which will probably declare it illegal. That in turn raises the question of how many Catalans are prepared to effectively break the law by even turning up to vote.

Britain will end the free movement of labour immediately after Brexit and introduce measures to drive down the number of lower-skilled EU migrants, according to a leaked government document published by the Guardian newspaper. That is something of a bombshell after a few weeks in which the debate over Brexit tended to go in the direction of a smooth transition allowing British business to carry on trading as seamlessly as possible - which is totally incompatible with any pledge to halt free movement from the outset.

At least one major business federation has come out and said its members will be alarmed by such proposals, reliant as much of Britain’s economy is on immigrant labour. The unanswered question at this stage is what the real status of this Home Office document is, which the Guardian says has not been endorsed by the cabinet. It also looks to have been issued early last month: thinking may have evolved quite a bit since then.

MARKETS

As the S&P500 played catch-up to the weekend’s North Korea jolt with its biggest one-day loss in three weeks on Tuesday, perhaps the most eye catching move of the week has been the drop in 10-year U.S. Treasury yields of up to 10 basis points to as low as 2.05 percent today – its lowest since the week of the U.S. election last year after its biggest one day drop since May yesterday. The combination of North Korea nuclear tensions and further signals from the Federal Reserve that sub-target inflation is still a worry are dragging down bond yields and have weighed down the dollar further too.

Fed Governor Lael Brainard said the Fed should be cautious about further tightening until it was more confident on inflation reaching the central bank’s 2 percent target, views echoed by two other policymakers yesterday. These doubts have in recent weeks seen expectations of a third Fed interest rate rise in 2017 dissipate further, with futures markets now pricing in less than a one-in-four chance of another hike by year-end.

Aside from Treasury yields and the dollar, bank stocks also suffered from the ebbing rate rise speculation. U.S. financial stocks were the worst performing sector on Tuesday, clocking up losses of more than 2 percent in their worst session since May.

Angst about a second hurricane in little over a week brewing in the Caribbean and the looming debt ceiling row in Congress all weighed further on stocks and bond yields and another dire one-month Treasury bill auction appears to added a bid to the long-end of the Treasury curve, much like recent standoffs over government borrowing limits. Moody’s credit rating firm warned on Tuesday that the United States would lose its Aaa rating if it missed any debt payments over the issue and would not regain that status even if it subsequently resolved the hiatus.  

In Europe, the combination of all the above and speculation about possible monetary tightening signals from the European Central Bank tomorrow have weighed on stocks and debt yields there too. Eurostocks are expected to open about 0.4 percent down later, with disappointing German factory orders numbers for July raising more questions about the impact of the recent sharp euro gains on the regional economy – a factor many feel may stay the ECB’s hand in flagging any imminent policy shift. Euro/dollar was a touch higher above $1.19 earlier.

Wall St’s wobble and the simmering North Korea tensions kept Asia bourses on edge overnight  - with Japan’s Nikkei, HK’s Hang Seng and Seoul’s Kospi all in the red again.  Gold and the Swiss franc have edged back from recent highs, however. Hurricane jitters have international Brent crude prices back above $53 per barrel.

Editing by Toby Chopra

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