September 19, 2018 / 7:26 AM / 8 months ago

Daily Briefing: German spy saga - Merkel imposes compromise

LONDON (Reuters) - After weeks of wavering, Angela Merkel has made a decision on the future of the head of her surveillance agency, who stands accused of having far-right sympathies. It is a deeply questionable one, even though it probably shields her coalition from further fallout for now.

Hans-Georg Maassen, President of the Federal Office for the Protection of the Constitution, arrives for a meeting of the parliamentary committee that oversees German intelligence agencies in Berlin, September 12, 2018

The compromise was to sack Hans-Georg Maassen from his job as top spy chief (as her left-wing SPD partners wanted), but then hand him an interior ministry job instead - in a sop to the head of her right-wing CSU allies.

The SPD leadership is already facing criticism in its own ranks for what some have called a farcical compromise. But more generally, this type of fudge only heightens the sense that Germany’s body politic and some of its core institutions are at best half-hearted in their efforts to tackle extremism.

Don’t expect Brexit breakthroughs at tonight’s dinner kicking off the EU’s summit in the Austrian city of Salzburg.

There is no reason for either the British or Brussels side to make major concessions ahead of what will be a turbulent UK party conference season in coming weeks: the more important steps will come at a mid-October follow-up meeting and the now likely November emergency summit.

Salzburg is mostly about atmospherics and not making things more difficult for Theresa May back home: she is calling for goodwill to reach a final deal, and EU negotiator Michel Barnier continues to make soothing noises about the disputed Irish border issue. The hard stuff is yet to come.

Switzerland this morning upped its growth forecast for this year from 2.4 percent to a very robust 2.9 percent, boosted by a booming manufacturing sector, strong exports and one-offs like the Winter Olympics and the soccer World Cup (the organising bodies are based in Switzerland and so their revenues are allocated to the country's GDP).

Slightly darker clouds appear for next year: the risk of growing trade disputes mean it has kept its 2019 forecast at two percent.


How does one make sense of this market? Half of China’s exports to the United States are now subject to additional tariffs and China is retaliating with duties on $60 billion of U.S. goods. Other fronts too are opening up on the trade war – India is apparently mulling steel import duties. Markets though have responded with a shrug.

World stocks in fact are at two-week highs, emerging stocks are up for a second day, Wall Street closed higher last night and U.S. and German bond yields are at multi-month highs. Asian stocks this morning have jumped around one percent, including Shanghai which has added to yesterday’s 1.8 percent rise.  

One reason could be just trade war exhaustion. But more likely it’s because China has capped the tariffs and the U.S. too has taken 300 items off the original list of goods. And bank analysts still appear confident a compromise will be reached. 

Then, China’s premier Li Keqiang has pledged to not use the currency as a trade war weapon - relief for those who had thought Beijing must allow the yuan to gradually depreciate to claw back the lost competitiveness. That’s pushed the yuan higher today – it is set for its sixth straight month of losses against the dollar but then so are most emerging market currencies.

The dollar is trading just off six-week lows, providing relief to most emerging currencies. The other big factor, which Japan has just reminded us of, is that the protective cocoon of central bank policy is still enveloping markets in some parts of the world.

The Bank of Japan retained, as expected, its pledge to keep rates unchanged at minus 0.1 percent and bond yields around zero percent; Japanese trade data showed little sign of damage, with exports continuing to expand modestly. The yen is near two-month lows to the dollar.

In Europe, focus will be on Brexit issues as a summit kicks off in Salzburg. Sterling hit the highest since end-July earlier today and UK inflation later today will be closely watched. Analysts expect inflation to have declined a touch from last month. Also on the data front, U.S. current account data for the second quarter is due.

European stock futures are trading up 0.1-0.3 percent and after hitting a five-month low earlier this month, the STOXX 600 is now back to around 10-day highs and even though the region has seen continued fund outflows and underperformance, its cheap relative valuations are starting to lure back some investors.

Credit Suisse said today its base-case scenario sees Washington and Beijing negotiating a settlement in the next 6–9 months. Last week Deutsche Bank said it expected a compromise over the coming quarters, saying that could result in a 8 percent outperformance vs the market of its European basket of trade proxy stocks.

Corporate news so far is thin although the session could be animated by some earnings updates and some minor dealmaking activity.

The world's largest staffing company Adecco said it has seen a slowdown in growth so far in the third quarter, while home improvement retailer Kingfisher reported a 15 percent fall in half-year profits. Also on the watchlist are consumer groups Nestle and Unilever after a Reuters exclusive said they are among the bidders for GlaxoSmithKline's Indian nutrition business.

Emerging stocks rose 0.8 percent with Chinese mainland shares leaping 1.6 percent to two-week highs on hopes Beijing will undertake further stimulus to cushion the impact of another round of tariffs in the ongoing U.S.-Sino trade war. Hong Kong shares rose 1.3 percent while the yuan edged up after China pledged not to engage in competitive currency devaluation.

A general view shows the old town and the castle of Salzburg, Austria, September 18, 2018

Emerging currencies were mainly firmer. India’s rupee rose 0.2 percent with the steel ministry proposing higher import duty on some steel products to support the currency, which has plumbed record lows on Tuesday. Even the Turkish lira, which has underperformed in recent days, firmed 0.3 percent.

South Africa’s rand firmed 0.4 percent ahead of August inflation data. The central bank is expected to leave rates unchanged at its meeting on Thursday although some analysts say they would not be surprised if the bank did hike.

— A look at the day ahead from European Economics and Politics Editor Mark John and Deputy Markets Editor for Europe, Middle East and Africa Sujata Rao-Coverley. The views expressed are their own —

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