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MORNING BID EUROPE-A way out for UK's May: dare she take it?

* A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Sujata Rao. The views expressed are their own.

LONDON, Feb 8 (Reuters) - Between them, the European Union and Labour's Jeremy Corbyn have essentially shown Theresa May a way out of the Brexit deadlock. All she has to do is take on board the elements of a softer exit as set out in Corbyn's letter this week. EU officials told her yesterday they would be more than happy to tweak the future relationship bit of the Brexit agreement to accommodate that, and such a compromise stands more chance of winning the backing of a majority of UK parliamentarians than anything else mooted so far. The main snag is that its proposal for a permanent UK-EU customs union is a big red line for May - it would prevent Britain signing independent trade deals and so put her at loggerheads with hard-core Brexiters. Still, a direction of travel out of this mess has now been revealed: will May at some point be forced to choose between party and country?

The eminently pointless slanging match between Paris and Rome has worsened this morning with Italy's deputy prime minister, Luigi Di Maio, vowing that a high-speed rail link with France will not be built as long as the 5-Star Movement is in office. This came after France decided yesterday to pull its ambassador from Italy following a series of verbal attacks on Emmanuel Macron by Italian leaders. You'd think they would have better things to go: The cost of insuring exposure to Italy's sovereign debt and bonds issued by the country's banks jumped on Thursday after the European Commission slashed growth forecasts. But both Di Maio and his coalition colleague (and political rival) Matteo Salvini, seem to have decided that France-bashing is a key part of their campaign strategy for European Parliament elections. Expect plenty more before the vote in May.

Finland's government has just released the first findings from a two-year basic income trial that ended a month ago, with researchers saying it failed to spur the unemployed to work more and earn more as was hoped. During the trial, 2,000 unemployed Finns became the first Europeans to enjoy a guaranteed basic income, a monthly 560-euro pay cheque from the state, regardless of whether they found work or stayed at home. Defenders of such schemes will argue that two years is far too short a time to see any of the social and behavioural changes that might flow from them. Finland in not alone in having to revamp its welfare model because of demographics and other factors, so the more detailed findings of the experiment will be closely watched as they emerge.

MARKETS AT 0755 GMT Donald Trump has decided after all not to meet with Xi Jinping before the March 1 deadline and the end of the 90-day truce on higher tariffs. That’s playing out in markets today -- Asia’s holiday-thinned shares are off four-month highs, emerging-market equities have lost half a percent, the Nikkei is at a one-month low and Wall Street closed last night with a 1 percent loss. Bonds are benefiting – 10-year U.S. yields hit a one-week low overnight of 2.643 percent; German 10-year yields look poised to break below 0.10 percent for the first time in more than two years. Of course, it’s looking ominous for economic growth. After disappointing PMIs in most places came yesterday’s shocker from the EU Commission, which cut forecasts for euro zone growth in 2019 to 1.3 percent from 1. 9 percent and for inflation to 1.4 percent from 1.8 percent. Italy, the euro zone’s problem child, is of particular concern -- growth was lowered to 0.2 percent, well below 2019 budget assumptions. The 10-year Italian spread versus Germany has widened more than 15 bps since the forecasts. European shares are opening more or less flat but S&P500 futures are sharply lower.

In the United States, 71 percent of companies have so far beaten fourth-quarter earnings forecasts, but current-quarter earnings estimates have been slashed to 0.1 percent from 5.3 percent when the year began.

On currency markets, the dollar is holding near two-week highs. The Fed may have turned more dovish, but so have most other central banks, and growth worries are dominating headlines in most markets. The Aussie dollar continues its descent, falling another 0.3 percent after the central bank cut growth forecasts for the economy. It’s now lost 2.4 percent this week. The euro is on track for its fifth day of losses, but it’s reacted surprisingly little to the European Commission announcement, even though Bund yields have plunged. Talk is of some central banks stepping in to buy. The dollar, with its superior yields, looks set to flex its muscles again. Sterling is well under $1.3 and waiting for Brexit news, but the gloom keeps deepening – India’s Tata Motors (BSE: TATAMOTORS.BO - news) , the owner of Britain’s Jaguar Land Rover, has posted its biggest-ever quarterly loss (and the biggest in Indian corporate history), $4 billion. JLR, which brings in most of its revenues, is expected to swing to a loss in the year to March after its China’s sales almost halved in the December quarter. Mumbai-listed Tata shares are down 18 percent.

After European stocks’ worst day in six weeks, the market was set for a tepid start. Futures were down 0.1 to 0.2 percent for the FTSE 100, DAX and Eurostoxx 50, although CAC 40 futures inched up 0.1 percent. L’Oreal, Ceconomy, Hermes, and Aker (Stockholm: AKERO.ST - news) Solutions reported strong earnings, while Umicore (Hamburg: 3771399.HM - news) gave a weak outlook and SSE (LSE: SSE.L - news) cut its profit outlook.

Growth fears and lack of progress in China-U.S. trade talks weakened appetite for emerging-market assets, with stocks falling for a third straight day, taking the EM MSCI index to its first weekly decline after six straight weekly gains. Currencies are struggling, with South Africa’s rand weakening 0.3 percent and underperforming its peers. The decline comes after President Cyril Ramaphosa announced plans to split state-run Eskom into three parts, making the future of the struggling utility the centre of his State of the Nation speech. As oil prices fell, Russia’s rouble lost 0.2 percent against the dollar as investors awaited the latest central bank decision. Policy makers are expected to keep rates unchanged at 7.75 percent but are keen to gauge forward guidance. Europe corp events: AAK (LSE: 0GUV.L - news) , Air France (Paris: FR0000031122 - news) traffic, Dometic, EMS-Chemie, Hermes International sales, ICA Gruppen (LSE: 0NB9.L - news) sales, Industrivarden, Recordati Rockwool International, Skanska (LSE: 0HBT.L - news) , SSE (Amsterdam: UW8.AS - news) trading), Umicore, Yara International (LSE: 0O7D.L - news) . Germany Dec trade balance France Dec industrial output UK Q4 GDP revision Russia central bank policy decision US Q4 earnings: Arconic (IOB: 0RJA.IL - news) , CBOE, Exelon, Phillips 66 (Hamburg: 18376318.HM - news) , Ventas (Frankfurt: 878380 - news) . (after-mkt): T-Mobile US St Louis fed chief Bullard speaks in Saint Cloud Sovereign credit rating reviews – S&P: Angola, Rwanda/Moody’s: Ireland (Other OTC: IRLD - news) , Albania/Fitch: Greece, Andorra, Lithuania, Slovenia (Editing by Larry King)

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