MORNING BID EUROPE-Discontent in Berlin; Barnier updates on Brexit

by Reuters
Friday, 9 February 2018 08:29 GMT

* A look at the day ahead from European Economics and Politics Editor Mark John and deputy EMEA markets editor Sujata Rao. The views expressed are their own.

LONDON, Feb 9 (Reuters) - Kevin Kuehnert, the formidable 28-year-old leader of the Germany's SPD's youth wing, is a player to watch in coming weeks. He will be rallying hard against the coalition deal his party has signed with Angela Merkel's conservatives and will be urging the SPD membership to veto it in a ballot vote due by the end of the month. Kuehnert's chief argument is that the SPD has sold out on its leftist principles for the sake of remaining in government and a particular target is ex-party leader Martin Schulz - who despite vowing never to enter a government with Merkel is now in line to become her foreign minister. That is going to take some explaining.

Despite the vast quantities of ink being spilled over Brexit in local media, the UK government is still some way from finalising its position going into talks on its future relationship with the EU, Brexit minister David Davis told parliament yesterday. Hopes for hard news are correspondingly limited therefore when his EU counterpart Michel Barnier hosts an 1130 news conference today after the past week of negotiation with his British interlocutors. The next significant deadline for some kind of clarity is the EU's March summit.


World stocks are set for the biggest decline since Sept 2011, we have seen the second 1000 point correction in the Dow in a week and we are officially in correction territory now (down 10 percent from the peak). The past week has seen record equity outflows of 30 billion. Bank of America's so-called Bull & Bear indicator is still at a level that says "sell", according to the bank. The question now is if whether this is the endgame for what's already the longest bull run in history or is it, as Barclays terms it, "a bump in the road"? The VIX closed yesterday around 33, still elevated levels. Let's see if the selling abates today – U.S. equity futures are pointing to a stronger open for Wall Street. But in Asia, the carnage continued, with emerging Asian equities down 2 percent to two-month lows, Chinese equities down 5 percent to suffer their worst day in two years and the Nikkei set for a weekly loss of almost 9 percent, its biggest since Feb 2016. And now, Europe is opening weaker too.

What kicked off all this was of course rising bond yields, and that story still continues, given the improved growth and higher spending picture in the U.S. and now potentially also in Europe. German 10-year bonds yields have risen for the past seven straight weeks, matching the longest stretch since 2007. If they end Friday higher, that would mark the longest stretch of weekly rises in 16 years. As of now Treasuries are holding off the 2.88 percent level – close to four-year highs - hit again in the previous session while UK yields are near the highest since 2015.

On currency markets, Yen is in sight of a 4-month high vs the dollar, the DXY index is just off two-week highs as the U.S. government has staggered into a shutdown and sterling is just off a $1.40 high, and the Swiss franc is close to four-month highs. The Chinese yuan meanwhile is set for its first weekly loss in two months after Thursday's 0.6 percent fall when Beijing removed some measures put in place to support the currency. Some are linking that also to the shocking recent trade figures that saw the trade surplus more than halve to $20.3b. Watch for UK trade and industrial output numbers.

And through it all, central banks show no sign of softening their tone, the message being: watch the data. The hawkish BOE yesterday was a case in point, then the Fed's Dudley chipped in to say "the little decline" in equity markets had little implication for the economic outlook. Today watch for comments from Rijksbank and Russia – some speculation the turmoil could induce the latter to postpone a rate cut that was all but baked in.

European shares. European stocks have opened moderately in the red after Wall Street's fresh sell-off but don't seem to be on their way to replicate the extent of their U.S. peers fall.

Earnings: Maersk missed fourth-quarter core profit expectations. German consumer electronics retailer Ceconomy reported a 16 percent drop in operating profit last month due to price reductions around Black Friday.

Company news and potential stock movers: Limited news on the corporate front so far but quite an event in Britain with the Daily Mirror buying the Daily Express. Potentially huge M&A deal with an FT report saying L'Oreal ready to buy Nestle's 23 bln euros stake. European banks are giving encouraging signals with Mediobanca this morning lifting its dividend. Belgium's Umicore also easily managed to raise close to 900 million euros to fund new investments in rechargeable battery materials at a discount of 2.7 percent to Thursday's closing price.

Emerging markets: Emerging equities fell another 1.7 percent on Friday to their lowest since late-December, set for their 7th day in the red and on track to end the week down 7 percent – their worst weekly performance since September 2011. Emerging stocks have now given up all their gains in the year to date.

South African stocks also fell 1.7 percent and were set to end the week down 5.5 percent, their worst week since January 2016, as the waiting game with President Jacob Zuma continued. ANC leader Cyril Ramaphosa has cleared his diary for Friday, fuelling speculation that he is making a final push to force Zuma to step down. The rand firmed 0.8 percent, having slipped to a three-week low overnight.

The Russian rouble was 0.5 percent firmer, just off a 1-1/2 month low ahead of a central bank meeting at which it is expected to cut rates by 25 bps to 7.5 percent. However, with inflation slowing to a record low of 2.2 percent in January, some analysts see the bank delivering a deeper 50 bps cut. (Editing by Peter Graff)

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