Morning Report: 16 October 2017

16th October 2017

GBP The European Commission President Donald Tusk sent a draft last week to the EU 27 states indicating that free trade talks could begin as soon as December if the negotiations had moved forward enough in terms of the Brexit divorce bill and EU citizen rights. However, the German Chancellor’s spokesperson quickly denied this; France and Germany asked for the draft to be amended to avoid giving the impression the EU would accept the beginning of the transition negotiations as soon as enough progress has been made with the UK. Keeping the spirit of Tusk’s comments alive could well be the main goal of Theresa May, who went to Brussels this weekend personally to help to drag the Brexit negotiations out of the mud. This week is all about sterling with the release of inflation figures tomorrow, average earnings on Wednesday and retail sales on Thursday, all critical for the Bank of England and the future of interest rates.

EUR The government in Madrid has set an ultimatum to the Catalan government to make clear whether they did, or did not declare independence. If Catalonia remains ambiguous on the point, or flat out states they indeed declared independence, Article 155 will be triggered, which will suspend the autonomy of the Catalan region. The Catalan president Puigdemont remains vague on the issue. He stated: ”I have a mandate to declare independence”, but without making clear whether he really did, or did not, declare independence. Elsewhere in Europe, the centre right FPÖ appears to have won the election in Austria, according to the first results coming in. The FPÖ is led by the 31-year old foreign minister Sebastian Kurz, who led the party to victory with a pro-European, but anti-immigration message. The developments in Austria and Catalonia and the re-emergence of nationalistic sentiments within Europe will surely be a talking point in the hallways of the European Council meeting that starts on Wednesday. In this summit European leaders gather and discuss recent broad developments in Europe. The Eurozone Trade Balance will be released at 10:00 this morning.

USD In another episode of weekend turmoil, Donald Trump announced on Friday that he no longer certifies the Iran nuclear deal, officially known as the Joint Comprehensive Plan of Action. Responses condemning Trump’s comments followed from a variety of sources, from within his own party, to the head of the UN, European leaders, and even the Russian Ministry of Foreign Affairs. The general tone of the criticism of Trump was that this deal is better than no deal, and that Trump risks the safety and stability of all the parties involved by his unilateral action. Elsewhere, economic data showed a slightly lower than expected Consumer Price Index on Friday, providing some doubts about the level of inflation in the US, which weighed on the dollar. This weakness has been reversed by comments from Fed Chair Janet Yellen, however, who this weekend once again repeated her favourite mantra- that inflation has been temporarily repressed, but is likely to spike up again in the coming months. Today the Empire State Manufacturing Index will appear at 14:30 BST.

CAD The loonie remains stable against the US dollar at the beginning of the week as crude oil prices continue to rise. Fighting broke out south of Kirkuk as Iraqi troops aim oil fields and Kurd territory. The Iraqi Prime Minister ordered his troops to cooperate with Kurdish forces. As a result, further upward pressure to crude oil is likely, which could lead to an appreciation of CAD ahead of Friday’s important inflation and retail sales releases.

UK news

  • FT. May urges Merkel to end stand-off over Brexit. PM phones German leader in push to break impasse ahead of EU summit in Brussels. Theresa May has personally urged Angela Merkel to end the Brexit stand-off at this week’s EU summit in Brussels after Berlin and Paris led moves to toughen the EU’s negotiating line in the next phase of talks. France and Germany have pushed for changes to a draft paper prepared for Thursday’s summit to avoid giving the impression that the EU will agree guidelines on a transition period as soon as “sufficient progress” has been made in addressing divorce issues such as the exit bill, according to top diplomats. The British prime minister called her German counterpart on Sunday in an attempt to break the impasse ahead of the high-profile summit, with UK officials arguing that negotiations could not progress unless they move beyond the current talks on a divorce settlement.
  • Reuters. Johnson says as May heads to Brussels: time to begin serious Brexit talks. Britain’s Foreign Secretary Boris Johnson said it was time to begin “serious negotiations” on Brexit, hours before Prime Minister Theresa May visits Brussels in an attempt to unlock the stalled talks. “We think in the UK that it is time to get on with these negotiations … for us to start some serious conversations about the future and the new relationship, the deep and special partnership we hope to construct,” Johnson told reporters. “I think we will work very much in the interests of both sides … let’s put a tiger in the tank, let’s get these negotiations going and stop letting the grass grow under our feet. We hope very much that our friends and partners will take that message and really begin to do some serious negotiations.” Johnson, arriving for talks in Luxembourg with his European Union peers on Monday, also said London made a “very good” and “fair” offer on safeguarding expatriates’ rights after Britain leaves the European Union.