Europe: Politics to remain in focus – Lloyds Bank

In view of analysts at Lloyds Bank, political risks will continue to be a driver of financial markets while in Brexit negotiations, both sides are targeting the EU summit of leaders on 14th-15th December to declare that “sufficient progress” has been made on issues relating to EU citizens’ rights, the Irish border and financial obligations.

Key Quotes

“PM Theresa May has reportedly won Cabinet approval to increase the UK’s financial offer, which is aimed at breaking the impasse in talks, enabling negotiations to move on from the ‘divorce’ to a new relationship. Today’s meeting between Mrs May and European Council President Donald Tusk will be followed by a dinner with European Commission President Jean-Claude Juncker on 4th December, seen as key to securing progress in negotiations to the next stage.”

“In Germany, the breakdown Chancellor Merkel’s attempt to form a coalition with the Free Democrats (FDP) and the Greens resulted in unusual political instability in the country. At the time of writing, the main opposition Social Democrats (SPD) is considering re-forming a ‘grand coalition’ with Mrs Merkel’s CDU/CSU, a move which had previously been ruled out. SPD leader Martin Schulz said that many rounds of talks will take place in the coming weeks and party members will vote on any final deal.”

“Meanwhile, consumer and business confidence continued to rise in the Eurozone, reaffirming expectations that the economy is continuing to expand at a robust pace. Domestic inflationary pressures, however, remain subdued. A big surprise in the Eurozone October CPI figures was the fall in the ‘core’ measure, which excludes food and energy, to 0.9% from 1.1%, with services inflation falling to 1.2% from 1.5%. The November ‘flash’ CPI (Thu) will be closely watched to see whether last month’s weakness was temporary, as we expect. As usual, the Eurozone figures will be preceded by releases in Germany, Spain and France.”

“Prospects for US tax reforms remain in focus. The House of Representatives passed its version of the tax bill last week and reports suggest that the Senate may vote on its bill next week. The Republicans have only a narrow 52-48 majority in the Senate, so it is not clear whether it will be passed. Moreover, both houses will still have to reconcile their versions of the bill before it is sent to President Trump.”

“There appears to be agreement to cut the corporate tax rate to 20% from 35%, but there is disagreement about the start date as well as a number of other disputes. Hence, it remains to be seen whether Mr Trump will be able to sign a tax reform into law by the year-end. A host of Fed officials are scheduled to speak next week. Most closely watched will be Chair Janet Yellen’s testimony to the Joint Economic Committee of Congress (Wed) and Chair Nominee Jerome Powell’s confirmation hearing at the Senate (Tue). In terms of monetary policy, Mr Powell is expected to represent continuity. The second estimate of Q3 GDP (Wed) may be revised up slightly from the advance estimate of 3.0% annualised. Personal spending and deflator figures for October are also due (Thu).”