MORNING BID EUROPE-Spanish post-election deadlock tightens

by Reuters
Monday, 4 January 2016 08:16 GMT

* 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.

LONDON, Jan 4 (Reuters) - Spain's post-election political deadlock got messier at the weekend as attempts to build a local government in the region of Catalonia collapsed. That reduces the secessionary threat for now and eases pressure on parties at the national level to secure a deal on a grand coalition in Madrid. Prime Minister Mariano Rajoy's centre-right People's Party (PP) and the opposition Socialists will continue plotting strategies before the Jan. 13 deadline for parliament to be reconvened, but a new general election later this year is looking increasingly likely.

It's the first major data day for Europe's economies with the manufacturing PMI readings plus Bank of England mortgage approvals data. Numbers out for Ireland, the euro zone's fastest growing economy, show its manufacturing sector expanding at the fastest rate in five months thanks to the weak euro boosting exports.


The twin market obsessions of last year, China and oil, continue to dominate on the first trading day of 2016. Shanghai shares lost almost 7 percent to their lowest since October after China's latest business surveys showed the manufacturing contraction deepening last month despite better news from the service sector. Another weakening of the yuan and the imminent expiration of a share sale ban from last summer were also cited as selling snowballed late in the day and trading was halted for 15 minutes. Emerging market equities overall are down 2.5 pct on the day. Oil, on the other hand, caught a bid from the deteriorating relations between Iran and Saudi Arabia following the latter's execution of a top Shi'ite cleric at the weekend and subsequent severing of diplomatic relations with Tehran after Iranian protesters stormed the Saudi embassy. With a possible surge in Iranian crude exports post-sanctions one of many reasons for oil's slide last year, there was some pause for thought at the sudden tension. But Brent's spike above $38 was short-lived given the China news and it's now only marginally stronger than Thursday's close. The Shanghai market tremor is also dominating the open in European equities, with losses of more than 2 pct expected. Wall St futures are down more than 1 pct at this early stage. A weaker dollar index has the euro/dollar FX rate back up just above $1.09. Treasury yields are lower and bund futures higher. Final Dec PMIs across Europe expected later, with preliminary German inflation also out.

Upcoming events/data/ themes for market reports on Monday:

- Global final Dec manufacturing PMIs

- Fed minutes of Dec meeting

- UK Nov mortgage approvals

- Germany flash Dec inflation

- U.S. ISM manufacturing (Editing by Sonya Hepinstall)

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