April 18, 2018 / 7:33 AM / a month ago

Daily Briefing: Lords ready Brexit challenge to May

LONDON (Reuters) - Britain's House of Lords is expected to inflict an embarrassing defeat on Theresa May's government today as it challenges her refusal to remain in a customs union with the European Union after Brexit.

Prime Minister Theresa May meets Jamaica's Prime Minister Andrew Holness at 10 Downing Street, April 17, 2018

The bigger question is whether that act of defiance encourages more pro-EU rebels in her own party to make a stand when the proposed amendment comes down to the lower house, where she has a slender majority. That is by no means a given, despite the fact it would require only about seven Conservative MPs to back the amendment.

Still, hopes in financial markets for a softer landing on Brexit than once feared are among the factors that have been boosting sterling against the dollar in recent months.

German unions and employers meeting well into the night yesterday secured a deal to boost the pay of more 2 million public sector workers by some 7.5 percent over two-and-a-half years. That breaks down to an initial 3.19 percent raise this year followed by a 3.09 percent increase from next April and the rest in 2020.

Along with the package already offered to steel and carworkers, these are some of the biggest wage increases for German workers in years and could start to boost spending in Germany’s increasingly consumer-led economy. That in turn would encourage the ECB it is on the right track to start tightening its policy this year as planned.

French railworkers embark on the latest round of strikes today, a day after parliament backed in first reading the government's plans to end the SNCF rail company's monopoly and curtail the special status of its employees. Finance Minister Bruno Le Maire said on Monday the strikes and other industrial actions were starting to take a toll in sectors such as hotels and tourism but that it was too early to assess the overall impact on the economy.

This is the fourth set of strikes since they were called - Emmanuel Macron will be watching closely for signs the participation is ebbing.

MARKETS

After weeks of sound and fury on trade and politics, world markets returned to brass tacks and are again focusing squarely on incoming economic numbers and corporate earnings. Flattered in part by U.S. tax cuts, the corporate numbers at least are pretty impressive.

Goldman Sachs hailed its financial trading division as the return of market volatility marked a blowout first quarter for the lender, while recent anxiety about the giant tech and internet firms eased somewhat as Netflix's impressive results sent its stock surging almost 10 percent to record highs. 

French President Emmanuel Macron reacts during the opening of a series of citizen's consultation meetings on Europe in Epinal, France, April 17, 2018

With 10 percent of the S&P500 already reported, the already punchy aggregate annual growth estimate for the whole 500 is creeping higher toward 20 percent.

Morgan Stanley and American Express are among those reporting later on Wednesday. U.S. economic numbers are also injecting a little more optimism, with both industrial output and housing starts for March beating forecasts and prompting a rebound in the recently-ebbing U.S. economic surprise index.

The S&P500 ended up more than 10 percent on Tuesday, with the tech-heavy Nasdaq up almost 2 percent. The Vix volatility gauge slipped back  below 15 percent to its lowest level in more than a month.

Asia’s main bourses all advanced in the slipstream, with benchmark indices in Japan, South Korea and Hong Kong all adding 1 percent or more. Even Shanghai stocks rallied after four straight days of losses as the People’s Bank of China’s surprise cut in bank reserve requirements on Tuesday helped offset ongoing U.S. trade war concerns and related problems for firms such as telecoms equipment make ZTE.

MSCI’s all-country index of world stocks is now firmly back in the black for 2018 so far with the International Monetary Fund on Tuesday reaffirming is robust 3.9 percent world economic growth forecast for this year and next.

While European economic numbers continue to underwhelm relative to consensus forecasts, there have been other positive twists this week to underpin equity markets there – not least a deal by Italy’s Intesa Sanpaolo to sell some $13 billion of non-performing loans for almost 30 cents in the dollar, seen by many as a turning point in the long running saga of ridding Italian banks of deadweight bad debts.

The gap between U.S. and German government borrowing rates, meanwhile, widened further. The 2-year gap is at its widest since 1989, while the 10-year gap is its highest since late 2016 at 234 basis points.

Elsewhere, the dollar steadied after early week losses. Sterling’s surge to its highest level since the month of the Brexit referendum was tempered as strong UK jobs and wage figures on Wednesday were still short of some expectations and traders await today’s release of UK March inflation report for more clues about the now widely expected Bank of England interest rate rise next month.

Brent crude oil was firmer above $72.

— 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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