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Daily Briefing: Hesse hazard for Merkel coalition

LONDON (Reuters) - More questions are being asked about the viability of Angela Merkel's ruling coalition in Berlin after both parties suffered heavy losses in this weekend's regional election in the large central state of Hesse, home to the financial capital, Frankfurt.

Social Democratic Party top candidate Thorsten Schaefer-Guembel, SPD members Gernot Grumbach and Gisela Stang react after first exit polls following the Hesse state election in Wiesbaden, Germany, October 28, 2018

Merkel’s left-leaning partners, the SPD, in particular have lost all sense of direction, with some commentators talking about an existential threat to one of Europe’s oldest political parties.

Its embattled leader, Andrea Nahles, has given Merkel an ultimatum to produce the kind of policy results within a year that would start bringing back voters, threatening otherwise to end the alliance. Merkel will respond this afternoon.

British finance minister Philip Hammond will warn hard Brexiters in his party today that any end to unpopular austerity measures will depend on averting a no-deal Brexit, implicitly urging them to get behind PM Theresa May's compromise plan.

While some forecasters say such a no-deal scenario would bring growth to a near standstill next year and push up state borrowing, Hammond’s standing with hard Brexiters in Conservative ranks is so low that it is far from certain they will be impressed by his warnings.

He told weekend talk shows the biggest item in this afternoon’s budget would be the increase in spending due to go to the health service, with other measures due to include more spending on roads, a tax cut for small retailers hammered by online competition and more spending on broadband.

Standard & Poor’s on Friday left Italy’s sovereign debt rating unchanged but lowered its outlook to negative from stable, saying that the new government’s policy plans were weighing on the country’s growth and debt prospects. Sheer relief that there was no ratings downgrade has pushed Italy’s bond yields sharply lower this morning.


Fresh worries about trade-related hits to Chinese corporate profit growth and incoming earnings unnerved Shanghai stocks on Monday, sending another negative pulse across Asia bourses after a torrid week on world stock markets that saw MSCI’s all-country global index lose almost 4 percent to its lowest in more than year - making October so far as the worst month for global stocks since 2011.

After weekend data showing Chinese profit growth slowed for the fifth straight month in September, the Shanghai-Shenzhen composite CSI300 dropped more than 3 percent in its worst day in more than two weeks.

China’s offshore yuan weakened too, though it remained above Friday’s trough – the weakest since January last year. Seoul’s Kospi lost more than 1 percent, Jakarta was down about half a percent and Japan’s Nikkei was modestly in the red. Australia’s benchmark outperformed with gains of more than 1 percent, however.

Although S&P500 futures were down overnight, showing little sign of a bounce after Friday’s lunge to its lowest since May, there were more positive signs for European stocks.

The EuroStoxx 50 opened up 0.45 percent, with a mix of positives, from S&P Global credit rating firm declining to downgrade Italy’s sovereign rating on Friday to indications from Germany’s Social Democrats that they would stay in coalition with Chancellor Merkel’s conservative for, even though both parties saw big losses of support in weekend state elections in Hesse.

Higher-than-forecast third-quarter revenue growth from HSBC also helped the early mood in Europe in another heavy week for corporate earnings, and HSBC stock opened up 5 percent before the bell.

Italian bond yields fell on Monday, with 10-year borrowing costs hitting a one-week low after S&P’s decision to leave Italy’s rating two notches above junk territory, although it lowered its outlook to negative to stable. Moody’s had cut its rating the previous week. The Italian yield spread over Germany fell to 300 basis points from 306 bps late Friday.

Outside the region, Brazilian stocks and the real are expected to rise after right-wing candidate Bolsorano won Brazil’s presidential elections on Sunday. Tokyo-listed Brazilian stock ETFs were up more than 10 percent overnight. Elsewhere, currency markets were calmer than the equity markets, with dollar index up marginally and both dollar/yen and euro/dollar flat versus Friday’s closes.

Sterling was also little changed ahead of UK finance minister Philip Hammond’s autumn budget statement later in the day. Ten-year U.S. Treasury yields were a touch lower at 3.06 percent. Brent crude oil prices were down at just above $77.

-- 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 --