MORNING BID EUROPE-Cold Turkey in Brussels

by Reuters
Tuesday, 13 December 2016 08:31 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, Dec 13 (Reuters) - Much of the buzz at today's meeting of EU foreign ministers in Brussels today will be about whether their future Washington counterpart will be an oilman from Texas. Donald Trump is expected to name Exxon-Mobil Corp's Rex Tillerson as his choice for secretary of state early US time on Tuesday, a nomination that will raise major questions in Europe about Tillerson's ties to Vladimir Putin's Russia. First up on the official agenda, however, is a bid led by Austria and the Netherlands to suspend talks with Turkey on its EU membership over the massive post-coup purge ordered by Recep Tayyip Erdogan. It is not clear that the two countries will get backing from other states to do so, especially as Turkey's help is needed to stem migrant inflows into Europe. But any accession hopes Ankara had been cherishing have long since dimmed anyway, as enlargement of the EU looks gradually to be coming to a halt. Now it looks as though attempts to revive Macedonia's stalled EU bid will face added questions after it emerged last night that veteran national leader Nikola Gruevski won this weekend's election. Brussels has long been a tough critic of Gruevski's record on safeguarding democracy and the rule of law.

Many will envy the read-out on the Dutch economy given by the country's top forecaster this morning. The quarterly review showed growth at around 2 percent this year and next, driven largely by strong domestic consumption, with unemployment seen falling to 5.3 percent next year and even the debt-to-GDP ratio falling below the 60 percent threshold (an official eurozone limit which many aspire to but few actually achieve) for the first time in seven years. The main risk to further economic growth at the moment, it seems, is from the unstable outlook outside its borders.

If new Italian Prime Minister Paolo Gentiloni's aim in unveiling a government remarkably similar to the old one was to reassure financial markets, then it seems to be working so far. The premium that Italy pays to borrow in bond markets compared with benchmark Germany fell to its lowest in over a month this morning. Yet it is not out of the woods yet. The new cabinet will face confidence votes in both houses of parliament this week and the small centre-right ALA party that supported ex-premier Matteo Renzi said it might not back the new government, raising doubts over whether Gentiloni will have the numbers in parliament to form a majority.


Even though Monday's oil/bond yield whoosh higher has leveled off into this week's Fed rate hike vigil, the incoming economic numbers continue to reinforce the picture of surprising growth and reflation. China reported bigger-than-expected gains in industrial output and retail sales for November overnight, another explanation for the buoyancy of commodity markets at least of late. And, although exaggerated by sterling's summer fall, the UK is expected to report later today a rise in annual inflation back above 1 percent for the first time since 2014. Against this sort of global backdrop of positive economic surprises on net across G10 and emerging markets at large, a quarter point Fed hike tomorrow night will be relatively uncontroversial.

Markets have flattened out into the meeting, in part because many fear Fed chief Yellen may twin the hike with a typically dovish message on the rate rise trajectory for 2017. New Fed forecasts against the backdrop of a fiscally active incoming Trump administration will be watched closely regardless of the spin on words. With Brent crude stepping back a bit to just under $56, 10-year US Treasury yields are back just below 2.5 percent this morning after briefly popping above that level to two-year highs on Monday and the dollar is slightly easier. Chinese stock markets steadied after their shakeout Monday, with Asia bourses more mixed. Eyes are on Unicredit's 13 billion cash call, expected to be raised early next year and a big test of faith in the wider Italian banking system as the Monte dei Paschi problem reaches some sort of resolution. Italian sovereign bond spreads over Germany fell to their lowest in over a month this morning. Sterling is firmer, meantime, after UK finance minister Hammond on Monday pointed to a Brexit transition period that could take more than two years and soften the exit.

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

- Europe corp events: Bellway, SAS, InVivo

- German Chancellor Merkel and France President Hollande meet for Franco-German digital summit in Berlin

- Italy Oct industrial output

- Germany, Spain, Sweden Nov final inflation

- UK Nov inflation

- Germany Dec ZEW investor survey

- Italy government bond auction

- Belgium auctions government bonds

- EZ Q3 employment

- Brazil Oct retail sales

- US Nov import/export prices

- US Treasury auctions 30-year bonds

- Chile central bank policy (Editing by Sonya Hepinstall)

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