As Boris Johnson enters 10 Downing Street today, Britain’s official policy on Brexit becomes leaving the EU by Oct 31 “do or die”. Whether Johnson follows through on that promise – with its implicit suggestion of potentially grievous national self-harm – will be the stuff of the coming few months as he takes on an unconvinced parliament and unimpressed EU counterparts. After a knock-about speech yesterday with a convoluted “dude” acronym setting out his four main objectives, Johnson will get down to business this evening with his first proper address as PM and the key appointments of a cabinet that could either be very short-lived or make one of the most momentous steps in Britain’s recent history.
Italian deputy prime minister Matteo Salvini, leader of the far-right League, is due to address in parliament allegations that his party sought funds via an illicit oil deal with Russia. Salvini dismisses the allegations and argued that the matter did not warrant scrutiny by the legislature, but he was over-ruled by Prime Minister Giuseppe Conte. At this stage, the whole affair does not appear to have damaged Salvini’s standing with voters but it is yet one more point of contention tugging at the ever weaker strings holding the coalition together.
Today sees the swearing-in of Annegret Kramp-Karrenbauer as Germany’s new defence minister, possibly one of the most thankless tasks in German politics. Kramp-Karrenbauer has already assumed the mantle of chair of the ruling CDU and is widely considered to be Angela Merkel’s preferred succession chancellor candidate. Her early days in the limelight, however, have not gone well, with a series of high-profile blunders. She inherits an army that saw its budgets run down under Ursula von der Leyen, another Merkel protege now elevated to the post of European Commission president: with limited defence experience to call on, Kramp-Karrenbauer faces an uphill battle to prove herself in the role.
MARKETS AT 0655 GMT
World stock markets are fairly buoyant given the decent early soundings from earnings, the imminent wave of central bank easing and some glimmers of hope on renewed U.S.-China trade talks. Wall St stocks pushed back up toward record highs overnight as Texas Instruments gave another shot in the arm to the upbeat chip sector and Facebook, Tesla and Caterpillar were due to report later. The main indexes stayed shy of new milestones however. Asia’s bourses are mostly higher too, helped by reports that U.S. Trade Representative Lighthizer is heading to Beijing next week. The euro’s marked weakening ahead of tomorrow’s European Central Bank meeting and chance of further easing as soon as this week was the most eye-catching mover on the currency markets, with euro/dollar dipping to its lowest since May first thing before finding its feet. The ripple effects of another round of ECB easing are also being felt around the edges of the euro zone too, with the Swiss National Bank expected to face a conundrum of matching any ECB easing or having to intervene to rein in the soaring Swiss franc – which powered to another two-year high against the euro on Tuesday before steadying this morning. In turn, another round of SNB reserve accumulation has reverberations across core euro zone bond and even stock markets – where it has banked a considerable portion of its gigantic foreign cash pile in the past.
With futures markets now appearing to settle on a quarter point U.S. interest rate cut from the Federal Reserve next week, futures market expectations of a larger 50 basis point move ebbed further to just a 17% chance. The dollar and U.S. Treasury yields mostly held gains from recent sessions, with the DXY dollar index touching its highest in more than a month overnight before edging back. The big reality check from the macro data world today comes from flash July business survey readings from around the globe. Japan’s composite reading rose to 51.2 from 50.8 last month, with manufacturing remaining in contractionary territory despite improving. On the other hand, French readings just out slipped lower this month. The IMF on Tuesday trimmed its global growth forecast for this year and next, citing trade war worries and Brexit, but it took an axe to many of its standing 2019 forecasts for major emerging economies such as Brazil, Mexico and South Africa.
Back in Europe, the ECB holds all in thrall, but a heavy earnings season slate here too is being watched closely as aggregate expectations for Q2 profits have slipped into negative territory again – well below the marginally positive equivalent stateside. The ailing Deutsche Bank’s latest update showed a Q2 loss of $3.51 billion due largely to restructuring costs, but its shares fell once again and were down about 3% after the open. Sterling held reasonably over the past 24 hours after the expected election of former foreign minister and hard Brexit advocate Johnson as the next UK Prime Minister. The focus now is on who resigns from the existing cabinet and whom Johnson appoints to key economic policy posts such as the Treasury and Bank of England. While his first steps in trying to break the Brexit impasse will be make or break, many investors now assume an election is highly likely before year-end as he will struggle to secure an exit from the European Union by the Oct 31 deadline with or without a deal. If he does succeed in office, however, there are expectations of a UK fiscal stimulus. Bank of England chief economist Haldane on Tuesday said he was not in favour of a further easing of monetary policy and felt other means of supporting the economy, including fiscal and supply-side measures, should now be considered. Spanish bonds were steady after Spain’s parliament on Tuesday failed at its first attempt to endorse acting PM Sanchez as premier – but that was largely expected and another vote is due on Thursday.
On the European corporate news front, banks were back in focus. After strong gains in the previous session on the back of solid updates from Santander and UBS, banks are set to be weighed down after Deutsche Bank posted a larger-than-expected loss of 3.15 billion euros in the second quarter due to major restructuring costs. DB shares fell about 3% in early Frankfurt trade. In autos, Daimler shares are up 0.9% in early Frankfurt trade as the luxury car maker said it would intensify cost cuts after legal risks for diesel-related issues and the cost of replacing Takata airbags triggered a 1.56 billion euros loss before interest and taxes in Q2. Earlier this month Daimler pre-released earnings in what amounted to its fourth profit warning in 13 months. In France, PSA Group delivered a sharp increase in H1 profit, as new models and the integration of Opel-Vauxhall more than made up for weaker emerging-market sales. One trader sees PSA shares rising 3% at the open. Aston Martin however cut its 2019 forecasts on UK, Europe weakness. Following a strong update from Apple supplier AMS on Tuesday, chipmakers could find further support after Texas Instruments Q2 earnings and sales beat estimates, soothing demand jitters and sending its shares up sharply. In Europe, Dutch semiconductor supplier ASM International reported a 25% increase in Q2 revenue, beating expectations, driven by its logic chips and fabrication business. Fresh signs of progress in Sino-US trade talks are also helping chips and other trade exposed sectors. Shares in Covestro rose 1.8% in early trade after the chemicals maker confirmed its FY core profit outlook, saying it met its Q2 targets despite challenging global economic conditions. A solid update also from paints and coatings maker Akzo Nobel posted a better-than-expected 36% jump in Q2 core profit, as higher prices and cost savings offset raw material inflation. * July flash business surveys from around the world.