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Daily Briefing: Brexit and beyond - EU in Tallinn

LONDON (Reuters) - European Union leaders gather for a dinner tonight in the Estonian capital Tallinn on the eve of a summit on the Union's digital strategy. Yet talks are more than likely to focus on French President Emmanuel Macron's ambitious proposals for EU reforms set out earlier this week.

FILE PHOTO: French President Emmanuel Macron (L) escorts Britain's Prime Minister Theresa May as they arrive to speak to the press at the Elysee Palace in Paris, France, June 13, 2017. REUTERS/Philippe Wojazer

British Prime Minister Theresa May will also attend and EU officials expect her to use the occasion to talk Brexit with her counterparts. Earlier in the day, a press conference in Brussels should reveal whether any breakthroughs at all have been made in the latest round of Brexit negotiations.

The cheerful mood among German shoppers clouded unexpectedly heading into October, the regular GfK survey just out showed, suggesting that a consumer-led upswing in Europe’s biggest economy could lose some steam in coming months. It seems to have been linked to a perception among many that incomes - and hence purchasing power - are stagnant.

Germany’s leading economic institutes are still expected later to raise their growth forecasts for Europe’s biggest economy for 2017 and 2018. The institutes could also spell out policy recommendations for the next coalition government.

In Barcelona, Catalan leader Carles Puigdemont has called for an urgent meeting of the region´s security council, which includes regional and state security forces. Puigdemont's government opposes Madrid's decision to take control of the regional police in order to prevent a banned independence referendum planned for Sunday. There is still a great deal of confusion about how things will pan out on the ground this weekend.


The re-emergence of the Trump/Yellen trade hooked on U.S. tax cuts and interest rate hikes continued to ripple through world markets overnight, with a re-alignment of sectors and regions and assets.

Wall Street took U.S. President Donald Trump's latest tax proposals well despite a lack of funding details that has jarred with the bond market somewhat. The S&P500 set another intraday record high and small cap stocks outperformed, as shown by the 1.9 percent jump in the Russell 2000 index. The twin tax cut and rate hike speculation, stoked by Trump’s tax reform plans and Fed chief Yellen’s strong signal on Tuesday of further gradual interest rate rises ahead, saw financial stocks lead the way.

Concerns about the Fed and deficit funding sent 10-year Treasury yields to their highest since mid-July, with the 2-10 year yield curve steepening to its highest in a month. This week’s dollar rally continued, meantime. Its gains were most marked against Japan’s yen, where it was probing above 113 yen this morning as traders eyed the jump in Japan’s 10-year government bond yield toward levels where the Bank of Japan would be expected to buy bonds to maintain its zero percent target for long-term rates.

Euro/dollar held above $1.17 overnight, with European benchmark bond yields climbing in the slipstream of Treasuries as well. The 10-year TransAtlantic yield gap widened to 185 basis points, however, its widest since early July.

Emerging markets are the big losers from the dollar and Treasury yield gains. MSCI’s emerging markets equity index is on course for its sixth straight daily decline, the index’s longest losing streak since May 2016 and down almost 4 percent in 10 days. European stocks are expected to open 0.25 percent higher, with European debt and equity markets eyeing the release of flash German inflation figures for September.

Sterling was flat to slightly firmer ahead of a speech by Bank of England governor Carney later at an event to mark 20 years of BoE policy independence.