European Morning Briefing: Trump Debt Deal to Lift Stocks
Snapshot:
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Stocks seen gaining; USD/JPY 109.07-08; bund yield 0.349%; Brent crude $54.13; gold $1334.02
-Trump Stuns GOP by Dealing With Democrats on Debt, Harvey Aid
-Spain Moves to Block Catalonia Referendum on Independence
-Sanofi Stops Work on Two Zika Vaccines
-Fed's Beige Book: Growth Continues Despite Slowing Employment Gains
-China PBOC Injects CNY298 Bln Liquidity Into Banks Via Medium-Term Lending Facility
Watch For: ECB interest rate announcement, Draghi briefing; eurozone GDP; Germany industrial production; France trade data; Greece labour force survey; OECD indicators; EIA weekly petroleum report; EU foreign ministers meeting in Estonia; speeches by Fed's Mester, Bostic, Dudley; Bollore earnings
Outlook:
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The European Central Bank is walking a tightrope as it prepares for its most momentous decision in years: How to wind down its giant bond-buying program without derailing the eurozone's economic recovery.
With the region's economy finally showing some vigor after years of painfully slow growth and political tensions there fading, Mario Draghi is expected to signal as soon as Thursday's policy meeting that the bank will start winding down its EUR2.3-trillion stimulus program.
It isn't entirely clear yet whether Mr. Draghi will send that message on Thursday or do so in October. Either way, ECB officials have indicated that the QE program would continue for another few months and be phased out by the middle of 2018.
Investors are on edge, ready to unload eurozone government bonds and buy the euro currency as soon as the central bank clearly signals the retreat is coming.
Headline News:
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President Donald Trump stunned Republicans on Wednesday when he overrode pleas from GOP congressional leaders and sided with Democrats on a proposal to attach emergency aid for Hurricane Harvey victims to measures to keep the government funded and its borrowing limit suspended until mid-December.
Mr. Trump's decision to strike a deal with Democrats upended the partisan alliances that have long set the boundaries of congressional policy-making, opening up new possibilities for bipartisan deal-making if Democrats can again persuade Mr. Trump to bypass Republican leaders. The president's move Wednesday raised questions about whether he will now turn to Democrats to reach deals on tax reform and immigration.
If approved by Congress, the agreement would defer the threat of a partial government shutdown and a default on the country's debt until Dec. 15 and dispatch the first $7.85 billion installment of Harvey relief, clearing the three most pressing items from the crowded September legislative agenda.
The Spanish government on Wednesday asked a top court to block the Catalan regional government's bid to hold a referendum on independence, the latest clash in what has become Spain's most pressing political issue.
Lawmakers in Catalonia's regional parliament were debating proposed legislation to convene a referendum on independence when Spain's deputy prime minister said in televised remarks that the government wouldn't allow measures that courts have previously ruled violate the country's constitution.
"The government has asked the Constitutional Court to declare null and void the adopted agreements," Deputy Prime Minister Soraya Sáenz de Santamaría said. "We are defending the rule of law in Spain and democracy in Catalonia," she added.
Stocks:
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European equities are primed for opening gains Thursday, with DAX futures up 67 points and FTSE 100 futures 17 points higher.
Asian equities bounced back on Thursday, tracking U.S. gains following a deal to extend the federal government's borrowing limit for three months.
Korea's Kospi led gains, rising 1.2%, as attention--for now--shifted away from North Korea. Elsewhere, Hong Kong's Hang Seng Index was up 0.5% as trading began, while Singapore's Straits Times Index added 0.4%.
On Wednesday, U.S. stocks rose after Donald Trump's deal with congressional Democrats. The surprise deal suggests Mr. Trump could show more flexibility on other spending initiatives with the Democrats, analysts say.
"Investors responded to the reduction in short-term uncertainty," said Michael McCarthy, chief market strategist at CMC Markets. However, he said the deal is a short-term fix, and will add pressure on the government as the new deadline of Dec. 15 looms.
In Japan, the Nikkei Stock Average was up 0.4%, as a recovery in the dollar against the yen helped boost export stocks. Meanwhile, Australia's S&P ASX/200 rose 0.3% with beaten down banking stocks staging a recovery.
Bucking the region's gains, however, were stocks in mainland China, which continue to move sideways as investors await new policy guidance from the government ahead of a major leadership summit next month. The Shanghai Composite Index was last trading flat, after ending Wednesday's session up a mere one point.
Corporate News:
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Drugmaker Sanofi has ended its development of two Zika virus vaccines, citing a decline in new infections and limits on U.S. government funding, in a move that illustrates the challenges in sustaining research in emerging infectious diseases after major outbreaks subside.
A division of the U.S. Department of Health and Human Services, the Biomedical Advanced Research and Development Authority, or BARDA, informed the French company's Sanofi Pasteur vaccine unit in August that the agency had reviewed the Zika projects it was funding and "decided to focus on a more limited set of goals and deliverables," Sanofi said in a statement posted on its website Sept. 1.
As a result, the company said it is discontinuing its development of the Zika vaccine it had been testing in partnership with the U.S. Army since last year.
Forex:
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The dollar continued to gain against the yen in Asia but dipped against other rivals following Wednesday's rebound.
The Wall Street Journal Dollar Index, which measures the U.S. currency against a basket of 16 others, was recently 0.1% lower at 85.23.
Although Mr. Trump's support for the Democrats' economic deal boosted the dollar, other concerns continue to hang over the U.S. currency, contributing to its 8% drop this year.
A slowdown in U.S. inflation has made investors increasingly skeptical that the Federal Reserve will be able to tighten monetary policy in the months ahead. Expectations that rates will rise only gradually tend to weigh on the dollar, as lower borrowing costs make the U.S. currency less attractive to yield-seeking investors.
Federal-funds futures on Wednesday showed a roughly 37% chance that the central bank, which has raised rates twice this year, will raise rates again by December. It was 47% a month ago.
At 0350 GMT, USD/JPY was 109.07-08, EUR/USD was 1.1927-30 and GBP/USD was 1.3049-51.
Bonds:
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U.S. government bonds pulled back Wednesday. with the yield on the benchmark 10-year Treasury note settling at 2.108%, compared with 2.072% Tuesday, which was its lowest close since Nov. 9.
At the same time, four-week Treasury bills rallied, reflecting better odds that holders would be paid on schedule.
Despite the increase Wednesday, the yield on the 10-year note is still much lower than most analysts projected at the start of the year, when it stood at around 2.5%.
Now just a "chip shot away" from 2%, the yield could easily drop below that level, though it would be difficult to hold there without an event that hurts the economy "rather than simply fears of things," said Michael Cloherty, head of U.S. interest-rate strategy at RBC Capital Markets.
Perceptions that the ECB's corporate sector purchase program will remain stable for much of 2018, even as other asset purchase schemes are tapered, should help propel corporate releveraging, strategists at Bank of America Merrill Lynch said in a note. BAML analysts examine a scenario under which the tapering of corporate bond purchases will be slower compared with a cut in public sector bond-buying.
Energy:
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Oil futures were flat in Asia, with both crude and gasoline not moving after respective gains and declines on Wednesday.
As U.S. activity continues to rebound post-Harvey, investors are focussing on Thursday's U.S. weekly oil data. Industry group API said U.S. stockpiles rose last week while gasoline fell, though both moves were smaller than the data anticipated in the government's reading.
At 0147 GMT, October Nymex oil was down 3 cents at $49.13/barrel, gasoline was unchanged at $1.6733 while November Brent was off 7 cents at $54.13.
Metals:
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London spot gold was little changed in early Asian trade after declines Wednesday following a debt deal reached between Donald Trump and Congressional leaders. Some profit taking has also emerged since gold hit a one-year high earlier this week.
Investors' attention for the time being will likely be on the upcoming meeting of the ECB for cues on monetary easing, though geopolitical tensions over North Korea continue to provide a floor. At 0223 GMT, spot gold was up 17 cents at $1,334.02/troy ounce.
Write to paul.larkins@wsj.com
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September 07, 2017 00:15 ET (04:15 GMT)