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Trump in Europe - the awkward guest

Ahead of the trip, Donald Trump has accused alliance members of being 'delinquent' on defence spending; referred to the 'turmoil' he expects to encounter on his next stop in the Brexit-embroiled UK.

NATO Secretary General Jens Stoltenberg (L) and US President Donald Trump (R) and staff speak at a breakfast meeting at the US chief of mission's residence in Brussels on 11 July 2018, ahead of a NATO (North Atlantic Treaty Organisation) summit. Picture: AFP.

LONDON - European leaders will look with some trepidation to Donald Trump's visit to Europe starting at the NATO summit in Brussels today.

Ahead of the trip, he has accused alliance members of being "delinquent" on defence spending; referred to the "turmoil" he expects to encounter on his next stop in the Brexit-embroiled UK, and suggested his Helsinki talks with Vladimir Putin might be the easiest part of the itinerary.

“So I have NATO, I have the UK which is in somewhat turmoil, and I have Putin. Frankly, Putin may be the easiest of them all. Who would think?”US President Donald Trump.

As far as NATO is concerned, the paradox is that this comes as the bloc has found new unity in combating the perceived threat from Russia and is set to expand further eastwards with Macedonia finally being ushered in as a member.

Yet Trump is shining a harsh spotlight on the long-standing imbalance in NATO country military budgets, with only the US, Britain, Poland and Estonia hitting the agreed target of spending 2% of GDP on defence.

Perhaps he is betting that his way of applying pressure will work where it has failed for past US presidents. Following June’s disastrous G7 meeting, which ended in division when Trump rejected the final summit statement, NATO envoys have carefully negotiated the main components of the Brussels summit communique days ahead. But as one said: “He can nullify everything with a tweet.”

The Czech parliament is expected to back today the new, centre-left minority cabinet led by billionaire Andrej Babis and including his ANO party and the centre-left Social Democrats. Babis's party won an election last October but has been unable to form a parliamentary majority as most parties reject working with him while he faces a police investigation of alleged fraud, which he denies.

Its fate depends on the pro-Russian, anti-NATO Communist Party whose votes are needed to form a majority. The Communists have agreed to provide support - the weeks and months ahead will see what price they extract for their backing.

MARKETS AT 0655 GMT

It’s been a case of one step forward, one step back again for world markets this week – today’s knockback coming courtesy of the latest salvo in the US-China trade war.

The detailing overnight of President Trump’s already threatened 10% tariff on an additional $200 billion of Chinese goods took the wind out investors’ sails largely because the central scenario for many in the markets is that Washington will eventually step back from this escalating row and settle for some compromise.

The more it turns up the heat, therefore, the more likely the tariffs get implemented – just like the 25% levies on $34 billion of each other's imports both sides triggered on Friday. The clock now starts ticking on a two-month period of public comment on the latest proposed list before the tariffs get imposed. Trump has said he may ultimately target more than $500 billion worth of Chinese goods - roughly the total amount of US imports from China last year.

Trump visits Europe this week and attends the NATO summit in Brussels today, heads to the UK on Friday and meets Russian President Putin in Helsinki on 16 July. Global business confidence has held up remarkably well despite the row, although there have been signs of anxiety – as with the July German ZEW survey out yesterday – and the upcoming Q2 earnings season may start to see some related profit warnings emerging.

Unsurprisingly, Shanghai markets were hardest hit overnight – with stocks there down almost 2% and the yuan weakening again towards last week’s lows, down 0.4% to 6.66 per dollar. Rather ominously, China’ foreign exchange regulator warned Chinese firms on Wednesday that they should hedge currency risks from the yuan’s increased fluctuations.

Hong Kong’s Hang Seng was down more than 1% too, as was Japan’s Nikkei as the yen received something of a ‘safety’ bid. Seoul’s Kospi outperformed but was also down 0.6%.

The Australian dollar, often seen as a liquid proxy for Chinese economic fortunes, fell 0.6%. Other bellwethers of global growth were also affected, with copper prices dropping 4% to their lowest in almost a year.

Ten-year US Treasury yields fell about 4 basis points to 2.83%, with the 2-10 year yield curve flattening again close to 11-year lows around 27 basis points. Wall St stock futures slipped back 0.75% after the S&P500 had climbed to four-month highs late Tuesday before the tariff announcement.

US Q2 corporate earnings get underway in earnest on Friday and aggregate annual profit growth is expected to come in at more than 20%. European stocks are expected to open about 0.7% lower too.

Euro/dollar was slightly lower, with European Central Bank chief Draghi and several other senior ECB officials speaking later in the day. Sterling was steady as attention shifts from the weekend’s Brexit developments and UK cabinet resignations to whether the Bank of England will feel confident enough to raise interest rates next month. BoE chief Carney speaks later today in Boston.

Turkey’s lira and debt markets remain on edge after this week’s Turkish cabinet announcements. Turkish Eurobonds nudged lower and local benchmark yields flirted with record highs.

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