August 6, 2018 / 7:28 AM / 2 months ago

Daily Briefing: Iran sanctions, German data spell EU gloom

LONDON (Reuters) - European leaders have promised to do all they can to preserve the Iran nuclear deal.

Iran's President Hassan Rouhani attends a news conference at the Chancellery in Vienna, Austria July 4, 2018. REUTERS/Lisi Niesner

But when Washington reimposes sanctions on Tehran after the tick of midnight, the EU’s powerlessness in the face of President Donald Trump’s new hardline policies will be on stark display.

Over the weekend, Trump’s top diplomat Mike Pompeo vowed to fully enforce the “snapback” sanctions, whose implementation will be detailed by the U.S. administration on Monday.

Iran, in a bid to halt a collapse of its currency linked to fears over the sanctions, is easing foreign exchange rules, state TV reported.

At a time of mounting stress on the Iranian economy, the doubts are growing about whether symbolic steps from China and Europe will be enough to save the deal.

There was gloomy news on the German economy with the biggest drop in industrial orders in nearly a year and a half.

The 4 percent slide was driven by a steep decline in foreign demand.

This will add to concerns about how trade tensions might affect Europe’s powerhouse economy in the second half of the year.

The risks of a trade conflict between the EU and US may have eased following European Commission President Jean-Claude Juncker’s trip to Washington last month.

But the rhetoric between Beijing and Washington is escalating, with Chinese state media accusing Trump on Monday of a “deceitful drama of extortion and intimidation”.

MARKETS AT 0655 GMT

As world stock markets held firm following the U.S. employment report, trade worries kept the heat on Chinese markets on Monday and Shanghai stocks once again underperformed with losses in excess of 1 percent – bringing the cumulative drop there since January close to 25 percent.

On Friday, China responded to the latest U.S. tariff threat with plans of its own to impose tariffs on some $60 billion of U.S. goods.

US President Trump pointed to the hit in Shanghai equities as an indicator that Washington was winning the row.

People look at an electronic board showing stock information at a brokerage house in Shanghai, China July 6, 2018. REUTERS/Aly Song

Moves by the Peoples Bank of China to limited yuan currency losses did have more success however.

Although the central bank on Monday set its weakest target point for the currency since May, the spot yuan rate firmed after moves on Friday to make speculative selling of the currency more expensive by imposing a 20 percent FX risk reserve requirement on yuan forward positions.

Chinese state banks were also reported to be selling dollars on Friday.

The ongoing pressure on Chinese markets was not reflected elsewhere, however.

Wall St stocks closed almost half a percent higher on Friday and the VIX volatility gauge touched its lowest in more than three months as the July employment report seen as relatively strong overall despite a sub-forecast non-farm payrolls gain and with little sign of building wage pressures to aggravate the Federal Reserve.

U.S. Q2 earnings are also ahead of expectations on aggregate.

The dollar was higher across the board on Monday, particularly against emerging market currencies such as Turkey’s lira.

The lira weakened 0.6 percent on its sixth straight day in the red and hitting a record low of 5.12 to the dollar after Friday’s late announcement by the Trump administration that it was reviewing Turkey duty-free access to U.S. markets – a move that could affect nearly $1.7 billion of Turkish imports to the U.S.

U.S. 10-year Treasury yields were more subdued at about 2.95 percent after slipping back from close to 3 percent on Friday.

European stocks were set for a higher open.

Italy’s two-year bond yields dropped back below 1 percent and its spread below 5-year BTPs is at the widest in 18 months as political concerns receded with economy minister Tria’s place in the government looking secure after concern last week surrounding cabinet budget talks.

Sterling was a touch weaker after UK trade minister Liam Fox said over the weekend the odds of Britain leaving the EU without agreeing on a deal stood at 60-40.   

On a slightly quieter day for European earnings, Europe’s biggest bank HSBC stole the spotlight with a revenue miss as well as capital buffer and total net asset value miss.

Shares in the bank were seen down 0.5 to 1 percent.

A look at the day ahead from Europe Special Correspondent Noah Barkin and EMEA markets editor Mike Dolan. The views expressed are their own. 

editing by John Stonestreet

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