The DAX index has rebounded in the Thursday session, erasing much of the losses seen on Wednesday. Currently, the index is at 11,744, up 0.24% on the day. On the inflation front, German WPI edged up to 0.4%, matching the estimate. This was the strongest gain in three months. In Brussels, EU leaders are meeting for a second day.
Brexit is a key topic on the agenda at the EU summit, but it’s unlikely that the leaders will issue a draft statement on Brexit, due to the impasse in negotiations. The European leaders sounded pessimistic about reaching a deal, unless Theresa May brings fresh proposals to the table. With only five months until Britain departs the EU, the likelihood of a no-deal scenario is very real. France has published a draft bill that allows the government to impose custom inspections and visa requirements on British visitors, in the event that no deal is reached. There has been little progress on the thorny issue of the Irish border. The EU is insisting that it will not sign a withdrawal agreement with Britain, unless there is a backstop which allows Northern Ireland to remain in a customs union with the EU after Brexit. However, the British government is unlikely to agree to such a move, since it would require regulatory barriers within the United Kingdom. In a conciliatory move, Michel Barnier, chief Brexit negotiator for the EU, offered to extend the transition phase by 12 months, which would leave it in place until December 2021. This would give the sides more time to work on the shape of a new customs union as well as outstanding issues. On the European side, the mood over Brussels is so sour that officials are saying that they may not hold a November summit, unless substantial progress is made in the next several weeks.
The Italian budget has triggered a crisis between Italy and the EU, which has weighed on European markets in recent weeks. However, market sentiment is more positive this week, with Italian stock markets moving higher. Will these gains be short-lived? The budget proposed by Rome increases the deficit to 2.4% of GDP, which breaches EU rules that require lower deficits. The budget will be sent later this week to the Italian parliament for approval. If it is approved, Rome and Brussels appear headed for a collision which could hurt European stock markets as well as the euro.
