Brexit talks, ECB meeting, Japan leadership race

Brexit talks resume this Tuesday as the EU and the UK enter the final phase of negotiations that both sides accept need to be wrapped up by the end of October if a deal is to be in place for when the post-Brexit transition period expires at the end of the year.

The other big event this week is the European Central Bank meeting on Thursday. The euro’s rapid rise in recent months has set alarm bells ringing at the ECB, with policymakers worrying that the currency’s strength is holding back the bloc’s economy and dragging down prices.

The US has a shortened week as it celebrates the Labor Day holiday on Monday, with officials calling for caution to avoid setting off a resurgence of coronavirus. Friday marks the 19th anniversary of the September 11 terror attacks on New York and Washington.

The leadership race to succeed Shinzo Abe as Japan’s prime minister continues, with Yoshihide Suga, the son of a strawberry farmer who started his working life in a cardboard box factory and has spent the past eight years as chief cabinet secretary, leading the pack.

Results from supermarket Wm Morrison, Primark owner AB Foods and Sportswear chain JD Sports add a slight retail flavour to the UK earnings calendar.

British Airways owner IAG holds its annual meeting, when the timing of chief executive Willie Walsh’s bonus will be in question as the aviation industry struggles through its worst-ever crisis.

Brexit talks

Another round of formal talks between UK chief negotiator David Frost and EU counterpart Michel Barnier kicks off in London on Tuesday, with neither side sounding particularly optimistic ahead of the meeting.

Boris Johnson said last Friday that Britain would “prosper mightily” even if it failed to agree a trade deal with the EU before the end of the post-Brexit transition period on December 31. The UK prime minister’s allies now increasingly speculate that the negotiations with the EU are heading for failure because of “unrealistic” demands from Brussels.

Mr Frost also played down hopes of a breakthrough. “We will negotiate constructively but the EU’s stance may, realistically, limit the progress we can make next week,” he wrote on Twitter.

Talks have stalled for weeks, notably over Brussels’ demands that the UK must adopt a robust regime to control state subsidies and avoid unfair competition.

Mr Barnier said last week that the UK had “not engaged constructively” with EU red lines and accused London of a “lack of engagement” on core issues. 

Further reading

Companies news and earnings

IAG holds its annual meeting on Tuesday, when shareholders will be asked to vote on a €2.75bn emergency fundraising to shore up its balance sheet as the pandemic pushes carriers around the world into crisis.

Institutional Shareholder Services, an influential advisory group, has also urged investors at the meeting to reject the airline group’s pay package — which includes a bonus of more than £800,000 — for chief executive Willie Walsh, who is set to retire after the meeting with Iberia chief Luis Gallego replacing him.

ISS said the bonus awards to Mr Walsh and other top executives would be inappropriate as the aviation industry faced its biggest crisis.

In the UK, Primark owner AB Foods updates on Monday when it is expected to reveal that trading at the fast-fashion outlet picked up in the final quarter, though still far below pre-Covid-19 levels. The group’s grocery business is expected to have performed strongly as well.

The downturn in the airline industry is likely to hit Meggitt’s commercial aerospace division when it reports on Tuesday. However, the engineering group has pointed to initial signs of recovery as flights begin to take off again, and said its liquidity was strong as it continued to cut costs.

On Tuesday sportswear chain JD Sports is expected to post lower first-half profit after footfall dropped during the pandemic. However, investors will be keen to learn if online demand grew and if the reopening of stores boosted sales.

Morrisons, Britain’s fourth-largest supermarket group, is expected to report a fall in first-half profit on Thursday as additional pandemic costs bite.

Ashmore posts full-year results on Friday and is likely to garner interest from investors keen to see if emerging markets, the fund manager’s area of focus, are “less likely to suffer a recession as severe as that in the developed world”.

Others this week include builders’ merchant Travis Perkins, packaging group DS Smith and rail and bus operator Go-Ahead.

We’re still in the between-season lull in the US, but those reporting include Lululemon Athletica, GameStop, Kroger and American Eagle Outfitters.

Central banks

The European Central Bank meets to set policy on Thursday, when most analysts expect it to hold back on expanding its asset purchases or cutting rates further to weaken the euro, preferring instead to signal its intentions to lower its inflation forecasts after the region slid into deflation last month for the first time in four years.

Analysts will wait to see if the ECB pushes back against the strong euro, a hot topic since the central bank’s chief economist Philip Lane said “the euro-dollar rate does matter”. Several members of the ECB’s governing council have said that the euro’s rise against the US dollar and many other currencies risks holding back the eurozone’s economic recovery.

However, another view among policymakers is that the currency’s position reflects an improving outlook for the single market and a vote of confidence in the EU’s €750bn recovery fund.

Analysts will also be on the alert for any signs the Federal Reserve’s recent shift in strategy to tolerate faster inflation has had any bearing on the ECB agenda. The ECB began to review its own monetary policy strategy earlier this year.

Further reading

The Bank of Canada will announce its interest rate decision on Wednesday, when rates are forecast to stay at 0.25 per cent.

There are also meetings in Serbia, Malaysia and Peru.

Economic data

Industrial production numbers for Germany, France and Italy and employment data for the eurozone will all be out in time for the ECB meeting on Thursday.

The UK has its industrial production figures on Friday, which follow retail sales data released on Monday. 

July’s retail sales were robust as more shoppers returned to the high street following the easing of coronavirus lockdown restrictions and the August reading is expected to continue this trend.

Gross domestic product data on Friday are forecast to show the UK economy continued to improve in July, and will be closely watched as the next Bank of England meeting nears.

The week’s two US inflation releases will be under extra scrutiny following the Federal Reserve’s announcement last month that it would shift policy to tolerate periods of higher prices.

On Thursday the producer price index, a measure of wholesale inflation, is projected to climb 0.2 per cent in August from the previous month, but be down 0.4 per cent year on year.

Then on Friday core consumer prices, an underlying measure of inflation that strips out volatile items such as food and energy, are expected to increase 0.3 per cent month on month — following a 0.6 per cent gain in July, which had been the sharpest increase in almost three decades — and be up 1.7 per cent year on year. 

US initial jobless claims will also garner the usual interest on Thursday, particularly after the monthly jobs report showed the labour market rebound was advancing in the world’s largest economy and last week’s initial claims fell to their lowest level since lockdowns began.

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