Wed, Sep 18, 2019 @ 16:11 GMT

US Pompeo outlined steep demand for Iran, or the strongest sanctions in history

    US Secretary of State Mike Pompeo outlined a list of demand for Iran to comply to, and threatened the country with “the strongest sanctions in history” if Iran doesn’t change course.

    12 requirements were listed out. Some include:

    • Iran must “stop enrichment” of uranium
    • Iran must also allow nuclear “unqualified access to all sites throughout the country.”
    • Iran must declare all previous efforts to build a nuclear weapon
    • Iran must cease from a range of activities throughout the Middle East that have long drawn the ire of the U.S. and its allies.
    • Iran must end support for Shiite Houthi rebels in Yemen,
    • Iran must “withdraw all forces” from Syria, halt support for its ally Hezbollah and stop threatening Israel.
    • Iran must also “release all U.S. citizens” missing in Iran or being held on “spurious charges”.

    Pompeo also added that “I know our allies in Europe may try to keep the old nuclear deal going with Tehran. That is their decision to make.” But, ‘they know where we stand.”

    Now, it’s time for EU to respond.

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    China Xi to strengthen global strategic partnership with Italy

      On the eve of his visit to Italy, Chinese President Xi Jinping wrote in Corriere della Sera newspaper saying that the country is ready to strengthen a “global strategic partnership”. Xi added that “with my visit I wish to set out together with Italian leaders the guidelines for bilateral relations and take them into a new era.” Additional, China like to coordinate more closely with Italy in multilateral organizations like UN, WTO and GD20. And both countries could develop joint projects in ports, shipping, telecoms and pharmaceuticals.

      Separately, Vice Foreign Minister Wang Yi said “it is hard to avoid misunderstandings occurring during the process of advancing the construction of the Belt and Road. But he emphasized that “facts are the best proof”. Italy is set to send a high-level delegation to the second Belt and Road summit in Beijing next month. And they would be the first G7 nation to join the initiative, which could upset the US and alert EU.

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      ECB Villeroy de Galhau: No rush to set out length of reinvestment period after asset purchases end

        ECB Governor Council member Francois Villeroy de Galhau said today that net asset purchase will “very probably end in December” as planned. However, he emphasized that “the end of our net asset purchases will not, however, mean the end of our monetary stimulus, far from it.”

        The pace of normalization would depend on incoming economic data. And three tools are at ECB’s disposal, including reinvestment of assets, interest rate and refinancing operations. Villeroy would prefer slowing the rate of reinvestment only after the first interest rate hike, which wouldn’t happen at least through the summer of 2019.

        He also added that “we are not obliged to rush, as early as at our December meeting, to set out the precise length of our reinvestment period.”

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        US update: Limited loss in Dollar and stocks after terrible retail sales

          While Dollar and stocks suffered some selling after shockingly poor retail sales data, there was no follow through selling. US retail sales contracted by most in 9 years in December. But some economists are quick to come out to express their skepticism on the data (see here).

          Bloomberg also reported that US and China are still far apart on the core issues in trade negotiations. In particular, dialing back subsidies for state-owned enterprises is a non-starter for the Chinese government. But this is actually much of a known in Asia.

          That is, for the Chinese government, buy more American products? Sure. Open up some market access? No problem except some sensitive ones, like internet and media. IP theft and forced technology transfer? Maybe, and they can do something to govern private owned companies. But SOEs? Well, it’s a fundamental government policy that cannot be touched. It’s an area that eventually, the US has to concede. So, this news shouldn’t trigger much pessimism among professional investors.

          Anyways, Dollar is currently the third weakest one for the day, next to Sterling and Canadian Dollar. Kiwi remains the strongest one. But Yen has already taken the second strongest place, followed by Swiss Franc indicating risk aversion.

          But as seen in the 4H heatmap, Dollar is the strongest one, followed by Swiss Franc and Yen. The greenback might be staging a rebound.

          Technically, EUR/USD’s recovery is held well below 1.1341 minor resistance. USD/CHF’s retreated is held above 1.1004 minor support, not to mention 0.9988 structural support. GBP/USD is in near term decline for 1.2391 low. AUD/USD is in consolidation above 0.7054 temporary low. USD/CAD breached 1.3329 resistance to resume the rebound from 1.3068. So all in all, today’s negative news doesn’t trigger much bearishness in Dollar.

          As for stocks, DOW hit as low as 25308.09 earlier today but it’s back above 25370, just down -0.66. That isn’t too serious. Our own view, as mentioned multiple times before, is that we expect further loss of momentum as DOW approaches 78.6% retracement of 26951.81 to 21712.53 at 25830.60. And the rebound from 21712.53 should complete around that level. However, break of 24883.03 support is needed to be the first sign of near term reversal. Otherwise, we cannot declare we’re correct yet.

          For now,

          • DOW is down -0.66%.
          • S&P 500 is down -0.44%
          • NASDAQ is down -0.13% only.
          • 10-year yield is down -0.045 at 2.663, back below 2.7.
          • 30-year yield is down -0.024 at 3.010, still above 3.0.

          In Europe:

          • FTSE closed up 0.28%, thanks to decline in Sterling.
          • DAX closed down -0.51%.
          • CAC closed up 0.04% only, erased nearly all early gains.
          • German 10-year yield is down -0.022 at 0.105. It breached 0.1 handle earlier.
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          Into US session: Dollar broadly lower as Trump asks Fed to feel markets rather than read numbers

            Risk sentiments stabilized in European markets as major indices are trading mixed. US futures also point to a mild recovery at open. Focus turned to selloff in Dollar today as Trump continued with his verbal intervention on Fed’s monetary policy. In, he asked Fed policy makers to abandon “meaningless numbers”. Instead, they should “feel the market”.

            Dollar is currently the weakest one for today. Canadian follows as second weakest as WTI crude oil extends recent decline to as low as 48.09, in spite of Dollar weakness. Swiss Franc is the third weakest. On the other hand, New Zealand Dollar is the strongest one for today, followed by Sterling, and then Yen.

            But technically, EUR/USD, GBP/USD AUD/USD and USD/CAD are staying in range. USD/JPY is trying to draw support from 112.23 support. There is not follow through selling in USD/CHF yet after breaching 0.9911. Dollar bears seem refusing to commit yet, as meaningless or not, Fed will release another set of numbers in economic projections tomorrow. They’re the ones critical for 2019 rate path.

            In European markets, at the time of writing:

            • FTSE is down -0.41%
            • DAX is up 0.38%
            • CAC is down -0.14%.
            • German 10 year yield is down -0.0178 at 0.242
            • Italian 10 year yield is up 0.004 at 2.953

            Earlier in Asia:

            • Nikkei closed down -1.82%
            • Singapore Strait Times dropped -2.21%
            • Hong Kong HSI dropped -1.05%
            • China Shanghai SSE dropped -0.82%
            • Japan 10 year JGB yield dropped another -0.0088 to 0.028
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            Sterling gapped lower as Brexit talks stalled at Irish border backstop again

              Sterling gapped lower as the week started with negative Brexit news again. The backstop on Irish border remained an unresolved issue despite efforts from both sides. And furthermore, as the negotiations stalled, there will be no more scheduled talks before the EU summit on later this week.

              EU chief Brexit negotiator Michel Barnier tweeted after meeting UK Brexit secretary Dominic Raab in Brussels that “Despite intense efforts, some key issues are still open, including the backstop for IE/NI (Ireland/Northern Ireland) to avoid a hard border.”

              Brexit Ministry said that there was progress “in a number of key areas”. “However there remain a number of unresolved issues relating to the backstop. The UK is still committed to making progress at the October European Council.”

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              China VP Liu to visit US on May 9-10 despite new tariff threats

                The Chinese Ministry of Commerce confirmed that Vice Premier Liu He will travel to the US on May 9-10 to resume trade negotiations despite re-escalated tariff threats. That’s a slight delay comparing to the original plan of traveling to the US on Wednesday. According to the MOFCOM’s statement, the visit was by invitation of US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin.C

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                Risk aversion dominates as Italian bond and Hong Kong stocks dumped

                  Risk aversion dominates the markets in the early part of European session. Australian Dollar is currently the biggest loser, followed by Euro. Yen is the clear gainer followed by Swiss Franc and Dollar.

                  On the one hand, Italy’s budget is a key focal point after EU officials basically rejected it. At the same time Deputy Prime Minister, 5-Star movement leader, Luigi Di Maio insisted today that “We are not turning back from that 2.4 percent target, that has to be clear … We will not backtrack by a millimeter.”

                  Italian 10 year yield surges as open and hit as high as 3.444, highest level since 2014. It’s staying up 0.079 at 3.384 at the time of writing.

                  On the other hand, German 10 year yield is down -0.031 at 0.435. Spread is now very close to 300 again.

                  On the other hand, Hong Kong HSI suffers steep selling back from holiday. It’s current down -2.55% and 27000 handle looks vulnerable. China is still on holiday. But selloff in HSI could be a prelude to SSE. US is now more ready to take on full trade war with China as settling Canada.

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                  DOW’s triangle pattern in shape

                    Asian markets are trading generally firmer today despite the selloff in the US on Friday. At the time of writing. Nikkei is trading up 0.65%. China’s SSE is back from holiday and is up 0.35%. Hong Kong HSI is up more than 1.8%.

                    However, we’d like to point out that risks for deeper global market selloff remains. As we pointed out in the weekly report too, DOW’s triangle pattern is in shape after Friday’s selloff.

                    DOW’s rejection from 55 day EMA, below the near term trend line, and Friday’s selloff set up the pattern from 23360.29 to be a triangle consolidation pattern. Immediate focus will be back on 23360.29 this week. Overall, price actions from 26616.71 record high are seen as correcting the up trend from 2016 low at 15450.56. We’d expect deeper decline before the correction completes. And break of 23360.29 will target 38.2% retracement of 15450.56 to 26616.71 at 22351.24.

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                    Reversal in NASDAQ and S&P 500 coming after steep selloff

                      The steep selloff in US stocks in the past two days is significantly raising the chance of near term reversal. NASDAQ closed down -107.42 pts or -1.39% over night to 7630.00. It’s down -3.82% from record intraday high as 7933.31. Bearish divergence condition in daily MACD shows notable loss in upside momentum. It’s now in a tentative support zone with 55 day EMA at 7623.45, and 38.2% retracement of 6926.97 to 7933.31 at 7548.88. While some support could be seen here, the strength of subsequent recovery will reveal whether the index is heading further down.

                      It’s a bit early to confirm. But we’d like to point out the bearish divergence condition in weekly MACD and RSI too. A firm break of the above mentioned 7548.88 fibonacci level will raise the chance of medium term correction. And fall from 7933.31 could extend to 38.2% retracement of 4209.76 to 7933.31 at 6510.91 before completion.

                      S&P 500 also closed down -16.22 pts or -0.58% to 2802.60 overnight. It’s starting to lose some upside momentum approaching 2827.87 resistance. We’d maintain the view that choppy rise from 2532.69 is a corrective move. And it’s likely the second leg of the medium term corrective pattern from 2872.87. Hence even in case of another rise, upside should be limited by 2827.87 to bring near term reversal. Break of 2795.14 support will be the first sign of such reversal . And firm break of channel support (now at 2751) should confirm.

                      Looking at the longer time frame, when the corrective pattern from 2872.87 extends, it should target 38.2% retracement of 1810.10 to 2872.87 at 2466.89 before completion.

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                      China PMI manufacturing rose to 50.5, economy still in a critical period of stablization

                        Official China PMI manufacturing rose to 50.5 in March, up from 49.2 and beat expectation of 49.6. That’s firstly the largest monthly rise since 2012. Secondly, it’s also the highest level in six months. The improvement from February’s 3-yer low suggests stabilization in the slowdown in the sector. PMI non-manufacturing rose to 54.8, up from 54.3, and beat expectation of 54.5 too.

                        In the release, it’s noted the improvement stemmed from post Chinese New Year production recovery and effect of growth stabilization policies. However, overall recovery in market demand is still not apparent. Export orders rebounded while expectations also improved. The positive signals from Sino-US trade negotiations have begun to take effect.

                        But overall, the statement noted that the current economy is still in a “critical period of stabilization and recovery”. And, it is necessary to “further consolidate and enhance confidence recovery, and to restore market demand and stabilize economic growth.

                        Full release here.

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                        EU Malmstrom: Retaliation tariffs on US basically prepared

                          European Trade Commissioner Cecilia Malmstrom said today that EU is ready to retaliate with extra tariff on EUR 35B in US imports, if the latter goes ahead with tariffs on EU cars.

                          She added, “we will not accept any managed trade, quotas or voluntary export restraints and, if there were to be tariffs, we would have a rebalancing list.”

                          And, “it is already basically prepared, worth 35 billion euros. I do hope we do not have to use that one.”

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                          SNB Maechler: Franc remains at a very high value, absolutely

                            SNB governing board member Andrea Maechler said that “franc remains at a very high value, absolutely”. And that’s why “we need an expansionist monetary policy”. Also, she stressed that SNB’s willingness to intervene in the currency markets.

                            Though, she also noted that SNB will weigh the pros and cons of intervention, as “we need to have a sustainable monetary policy and keep our margin of maneuver.”

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                            Into US session: Dollar and Yen strong as trade risks weigh down global stocks

                              Heading into US session, Dollar continues to lead the way higher, followed by Yen. Australian Dollar and New Zealand Dollar are taking turns to be the weakest. But Canadian Dollar is supported by resilience in oil price, as WIT regains 74 handle.

                              Risk aversion is back in the market, started from Asia where China’s SSE dropped -2.52%, leading others lower. Nikkei also lost -2.21%. European indices followed and open sharply lower initially. German DAX dipped to as low as 12132.72 but is now back at 12270, just down -0.3%. FTSE, on the other hand, is down -1%, pressing 7550. CAC is also down -0.85%.

                              Based on the actions in DAX, German Chancellor Angel Merkel’s problem with her own coalition seems to be not too bothered by the market. Instead, it’s likely the worries on trade war that’s weighing down on sentiments. In particular, Europeans could be feeling quite upset as Trump said the EU is “as bad as China, just smaller”.

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                              China to open up banking and insurance sectors as new round of trade negotiation with US starts

                                New round of US-China trade negotiations started in Beijing today. US Treasury Secretary Steven Mnuchin said he had a “nice working dinner” yesterday and “it’s good to be back here” in Beijing. It widely known that while progress has been made two key sticky points remained unresolved, an enforcement mechanism and the timelines for lifting imposed additional tariffs.

                                Meanwhile, China Banking and Insurance Regulatory Commission said it will further open up the banking an insurance sectors. And it plans to issue 12 new measures soon. The measures include dropping the USD 10B asset requirements for foreign companies to set up a legal entity in the country. The USD 20B asset requirements for foreign banks to set up a branch will also be removed. Approval procedures for foreign banks to conduct Yuan businesses will be removed.

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                                UK PMI construction dropped to 49.5, Brexit anxiety intensified

                                  UK PMI construction dropped to 49.5 in February, down from 50.6, missed expectation of 50.5. That’s also the first contraction in eleven months. Markit noted there was slight fall in construction output, led by commercial and civil engineering work. And, housing was the only category to register growth. And there was sharp deterioration in supplier performance.

                                  Tim Moore, Economics Associate Director at IHS Markit, which compiles the survey:

                                  “The UK construction sector moved into decline during February as Brexit anxiety intensified and clients opted to delay decision-making on building projects. Risk aversion in the commercial sub-category has exerted a downward influence on workloads throughout the year so far. This reflects softer business spending on fixed assets such as industrial units, offices and retail space. The fall in commercial work therefore hints at a further slide in domestic business investment during the first quarter, continuing the declines seen in 2018.

                                  “There were also reports that the more fragile housing market confidence has begun to act as a brake on residential work, which adds to signs that house building has lost momentum since the end of last year. This leaves the construction sector increasingly reliant on large-scale infrastructure projects for growth over the year ahead.

                                  “Construction companies pared back their purchasing activity in response to subdued demand in February, but delivery delays for inputs were among the highest seen over the past four years. Survey respondents noted that stockpiling efforts by the UK manufacturing sector had an adverse impact on transport availability and supplier capacity across the construction supply chain.

                                  “On a more positive note, input price inflation held close to January’s two-and-a-half year low. The slowdown in cost pressures from the peaks seen in the first half of 2018 provides a signal that the worst phase has passed for supplier price hikes related to sterling depreciation.”

                                  Full release here.

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                                  Into US session: CHF rises as Trump-Kim summit collapsed, Euro follows German yield higher

                                    Entering into US session, Swiss Franc and Euro are the strongest ones for today. It’s partly due to extended rally in German yields. But more so, judging that Yen is the third strongest, it likely due to collapse of Trump-Kim summit.

                                    Sterling is the weakest one for today, paring some of this week’s strongest gains. Canadian Dollar is the second weakest as WTI crude oil retreats.

                                    For the week, Sterling remains the strongest one, followed by Swiss Franc. Canadian is the weakest one, followed by Yen.

                                    Looking ahead, US Q4 GDP will takes center stage, with Chicago PMI and jobless claims featured. Canada will release current account, IPPI and RMPI but they’re unlikely to trigger any reaction.

                                    In Europe, currently:

                                    • FTSE is down -0.56%.
                                    • DAX is down -0.21%.
                                    • CAC is down -0.12%.
                                    • German 10 year yield is up 0.0142 at 0.163.

                                    Earlier in Asia:

                                    • Nikkei dropped -0.79%.
                                    • Hong Kong HSI dropped -0.43%.
                                    • China Shanghai SSE dropped -0.44%.
                                    • Singapore Strait Times dropped -1.15%.
                                    • Japan 10-year JGB yield dropped -0.0021 to -0.027.
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                                    BoJ: Global risks tiled to the downside, uncertainties heightened

                                      As shown in the Summary of Opinions at the December 19/20 meeting, BoJ board members sounded more concerned with global developments. The summary noted that “regarding the outlook for the global economy, risks have been tilted to the downside on the whole amid heightening uncertainties and a prevailing view that such situation will be protracted.”

                                      Specially, it said “looking at the latest data on trade activities in China, both exports and imports marked negative growth on a month-on-month basis, which possibly indicates a deceleration in the Chinese economy”. For Japan, ” it cannot be said that the actual condition of restoration-related demand and production stemming from natural disasters has been strong”. Also, “recovery in exports to China has been weak, and exports as a whole also have shown weak developments.”

                                      BoJ also maintained that “it is necessary to persistently continue with the current powerful monetary easing as the momentum toward 2 percent inflation is maintained.” And it warned that “trying to normalize monetary policy prematurely before achieving the price stability target could adversely strengthen the side effects.” The summary also noted that long-term yield should be allowed to “temporarily turn negative” and “move upward and downward more or less symmetrically from around zero percent”.

                                      Full BoJ Summary of Opinions

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                                      RBA kept cash rate unchanged at 1.50%, full statement

                                        RBA kept cash rate unchanged at 1.50%. The accompany statement is over 90% a carbon copy of the prior one.

                                        Globally, RBA noted that advanced economies are growing at above-trend rate with low unemployment which China’s growth slowed a little. Inflation remains low but further increases are expected. There is one ongoing uncertainty due to US international trade policy. Domestically, RBA maintain the forecasts of a bit above 3% growth in 2018 and 2019. Household consumption is one continuing source of uncertainty.

                                        Terms of trade are expected to decline over time but stay at relatively high level. Australian Dollar has “depreciated against the US dollar along with most other currencies.”

                                        Labor market outlook remains positive and further gradual decline in unemployment is expected to around 5%. Wage grow should pick up over time, gradually. Inflation is expected to slow to 1.75% in Q3 due to once-off declines in some administered prices. But it’s expected to pick up in 2019 and 2020.

                                        Full statement below:

                                        Statement by Philip Lowe, Governor: Monetary Policy Decision

                                        At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

                                        The global economic expansion is continuing. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. One ongoing uncertainty regarding the global outlook stems from the direction of international trade policy in the United States.

                                        Financial conditions remain expansionary, although they are gradually becoming less so in some countries. There has been a broad-based appreciation of the US dollar this year. In Australia, money-market interest rates are higher than they were at the start of the year, although they have declined somewhat since the end of June. These higher money-market rates have not fed through into higher interest rates on retail deposits. Some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago.

                                        The Bank’s central forecast is for growth of the Australian economy to average a bit above 3 per cent in 2018 and 2019. In the first half of 2018, the economy is estimated to have grown at an above-trend rate. Business conditions are positive and non-mining business investment is expected to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high. The drought has led to difficult conditions in parts of the farm sector.

                                        Australia’s terms of trade have increased over the past couple of years due to rises in some commodity prices. While the terms of trade are expected to decline over time, they are likely to stay at a relatively high level. The Australian dollar remains within the range that it has been in over the past two years on a trade-weighted basis, but it has depreciated against the US dollar along with most other currencies.

                                        The outlook for the labour market remains positive. The unemployment rate has fallen to 5.3 per cent, the lowest level in almost six years. The vacancy rate is high and there are reports of skills shortages in some areas. A further gradual decline in the unemployment rate is expected over the next couple of years to around 5 per cent. Wages growth remains low, although it has picked up a little recently. The improvement in the economy should see some further lift in wages growth over time, although this is likely to be a gradual process.

                                        Inflation is around 2 per cent. The central forecast is for inflation to be higher in 2019 and 2020 than it is currently. In the interim, once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower, at 1¾ per cent.

                                        Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Housing credit growth has declined to an annual rate of 5½ per cent. This is largely due to reduced demand by investors as the dynamics of the housing market have changed. Lending standards are also tighter than they were a few years ago, partly reflecting APRA’s earlier supervisory measures to help contain the build-up of risk in household balance sheets. There is competition for borrowers of high credit quality.

                                        The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

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                                        Sterling recovers mildly as UK PM May starts quick EU tour

                                          Sterling recovers mildly today as UK Prime Minister Theresa May starts her quick EU tour. May will meet Dutch Prime Minister Mark Rutte, German Chancellor Angela Merkel and then European Council President Donald Tusk and European Commission President Jean-Claude Juncker, to seek last minute changes to the Brexit agreement, to get it through her own parliament. May will meet Tusk and Juncker at 1600GMT.

                                          Andrea Leadsom, leader of Commons, said in a radio interview that “the EU is always in a position where it negotiates at the last possible moment.” And she emphasized that “if we want to avoid a no-deal Brexit next March we need to go back to the drawing board to ensure that the UK parliament has that democratic capability that it is demanding.”

                                          Irish Foreign Minister Simon Coveney said the the wording of the withdrawal agreement would not change “at all”. But he hoped that EU could provide the assurance May needs regarding the backstop. But at the same time, he added that “we are now actively, not only preparing for that, but taking actions to ensure that if necessary we will be ready on March 29 for Britain to leave the EU without a deal.”

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