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Japan's ruling Liberal Democratic Party drafts proposal to cancel visit by China's President Xi Jinping

TOKYO (BLOOMBERG) – Lawmakers in Japanese Prime Minister Shinzo Abe’s ruling Liberal Democratic Party (LDP) have drafted a resolution calling for the cancellation of a state visit by President Xi Jinping following China’s clampdown on Hong Kong.

If the proposal is approved at party meetings next week, it could be submitted to Mr Abe’s office as soon as Tuesday (July 7), according to lawmaker Yasuhide Nakayama, who heads an LDP foreign policy panel.

Party pressure for an official cancellation of the visit, which was postponed from early April as both countries battled the coronavirus, comes amid growing disquiet over China’s behaviour among US allies around the world.

There are fears the sweeping security law that came into effect this week in Hong Kong would undermine the city’s autonomy from the mainland and have a chilling impact on free speech.

Police on Wednesday made their first arrests under the new law amid protests marking the July 1 anniversary of the city’s handover from British rule.

There’s been criticism from foreign governments, with the US Senate approving a sanctions Bill aimed at banks that do business with Chinese officials involved in clamping down on Hong Kong’s protesters, and the UK offering a home to millions of Hong Kong residents.

“The LDP is looking at the situation in Hong Kong with great concern,” said Mr Nakayama. “The fact that about 400 people were arrested the first day the law came into effect is not something we can turn a blind eye to as fellow Asians, democrats and lovers of freedom.”

Hong Kong police arrested 370 people at protests on Wednesday, the day after the law came into effect. Of them, 10 were detained under provisions of the national security law.

The Japanese government’s criticism of China, its biggest trading partner, has been relatively muted.

Foreign Minister Toshimitsu Motegi issued a statement of regret over the legislation on Tuesday, in which he also urged China to respect the rights of Japanese people and companies in Hong Kong.

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Asian Insider, July 3: Xi’s Belt and Road hits a Pakistani bump

Hi all,

In today’s bulletin: Singapore’s election, Xi’s Belt and Road, Hong Kong adjusts to new realities, and fresh virus fears in Japan and South Korea.

Reading this on the Web or know someone who might enjoy receiving Asian Insider? Our sign-up page is here.

BARE KNUCKLES, KID GLOVES

With Singapore’s general election to fill a new Parliament exactly a week away, people are getting a closer look at candidates and the issues involved. In today’s Editor’s Take, which plays to our multimedia strengths, ST Editor Warren Fernandez explains how the gloves have come off between the ruling People’s Action Party and the opposition.

Meanwhile, Opinion Editor Chua Mui Hoong says the live debates featuring ministers and opposition leaders have proved remarkably civil. Also, she says, unlike in the 1990s, the PAP is no longer playing its incumbency to partisan advantage.

News Editor Zakir Hussain weighs in separately on a hot-button issue – voters’ fear of an influx of foreigners that could raise the island’s resident population to 10 million.

BELT AND ROAD BLOCK

Pakistanis and Chinese have always held that their relationship is as “close as lips to teeth”. That tight friendship is poised to be tested as the Imran Khan government tells Beijing that it needs to renegotiate the terms of several key infrastructure elements of the China Pakistan Economic Corridor (CPEC), a US$62 billion (S$86 billion) programme of power plants, roads and special economic zones that Beijing sees as a pilot project of its Belt and Road Initiative. As I argue here, BRI’s reputation will live and die on how Beijing tackles these concerns, which come on the heels of China-friendly Asian nations such as Malaysia also cancelling or negotiating the terms of some of their own BRI-linked projects.

For additional reading on how the Covid-19 pandemic has affected BRI projects see here.

SUZIE WONG’S UPTURNED WORLD

Reverberations from Beijing’s stringent new legislation to contain civil unrest in Hong Kong, which has sparked widespread outrage in the West, continue to roll on. On Friday (July 3), Hong Kongers were scrubbing their social media accounts, deleting chat histories and mugging up on cyber privacy as China’s newly imposed security law blankets the traditionally outspoken city in fear and self-censorship.

Beijing has appointed an official who became prominent during a 2011 clampdown on protesters in China as director of its new national security office in Hong Kong, Xinhua news agency reported. Mr Zheng Yanxiong, 57, most recently served as the secretary-general of the Communist Party committee of the southern province of Guangdong.

The United States has now stripped the territory, immortalised in the Hollywood romantic classic World Of Suzie Wong, of the “special status” it accords it. But what exactly does that mean? Here is a primer.

OVER AT GINZA…

Japan will not reintroduce a state of emergency to tackle the coronavirus, a government spokesman said on Friday (July 3), as cases in Tokyo rose to a two-month high driven by the spread of the virus in the capital’s nightspots. Tokyo reported 124 new cases on Friday, up from 107 the day before, partly due to increased testing among nightlife workers in the Shinjuku and Ikebukuro districts. But, despite the spike, the number of serious cases was declining and there was no need to reinstate the state of emergency that was lifted on May 25, Chief Cabinet Secretary Yoshihide Suga said. Tokyo is on amber alert – the third most severe in a four rank scale – with its medical facilities ranked at the lesser yellow level, indicating they are not in immediate risk of being overwhelmed.

Across the Sea of Japan or East Sea, South Korea, which was thought to have effectively contained the coronavirus, reported 63 new cases, most from domestic infections outside Seoul, triggering the return of tighter social distancing curbs in Gwangju city as the spectre of a second wave of the disease loomed. The tally marked the highest in two weeks and infections outside the Seoul metropolitan area showed a sustained increase, Yonhap reported. Gwangju recorded more than 50 cases the past few days, prompting the suspension of operations at public facilities such as public libraries and museums.

WHY MUHYIDDIN’S SMILING

As Malaysia braced itself for a widely expected mid-term election, the photograph of Tan Sri Muhyiddin Yassin on the steps of the Prime Minister’s official residence and surrounded by the top leaders of Perikatan Nasional coalition was one that spoke a thousand words. The group of 14 leaders, said veteran Malaysian journalist Joceline Tan, basically signalled that the Prime Minister had the numbers ahead of the July 13 Parliament sitting. 

The group photo has been widely read as a show of strength and unity amid the ongoing numbers game between Perikatan, in which Muhyiddin’s is the smaller party compared with big boys Umno and Parti Islam SeMalaysia, and the opposing coalition, Pakatan Harapan. Muhyiddin has plenty going for him in other ways, chiefly the deep division within the opposition bench, which has been split over who should be their prime minister candidate. 

IN OTHER DEVELOPMENTS

US Deputy Secretary of State Stephen Biegun, who led working-level negotiations with North Korea, is due to visit South Korea next week as it pushes for a resumption of talks with the North despite few signs of any progress. The talks are slated for next Tuesday (July 7), a government official told Reuters. South Korean President Moon Jae-in has said US President Donald Trump and North Korean leader Kim Jong Un should meet again before the US election in November.

India’s Prime Minister Narendra Modi flew into the northern Himalayan region of Ladakh on Friday, weeks after Indian and Chinese troops clashed at their disputed border there, escalating tension between the Asian giants. Officials said Modi was accompanied by the chief of defence staff, General Bipin Rawat, and the chief of the army, General Manoj Naravane.

Retail sales in shoppers’ paradise Singapore suffered its biggest year-on-year fall in May since record-keeping began in 1986 amid a second month of circuit breaker measures, but the worst may be over for retailers, with the economy’s phased reopening. Takings at the till plunged by 52 per cent year on year, after sinking a then-record 40.3 per cent in May, according to data released by the Department of Statistics on Friday.

Google and Singapore wealth fund Temasek Holdings are in negotiations to join a funding round of between US$500 million and US$1 billion for Indonesia’s largest online marketplace PT Tokopedia, people familiar with the matter told Bloomberg. Tokopedia, backed by SoftBank Group’s Vision Fund, has also held talks with US Internet giants, including Facebook, Microsoft and Amazon.com.

That’s it for today, folks. Track us on The Straits Times over the weekend. We have a buffet of great stories lined up. Insider will resume on Monday.

Meanwhile, seize the day!

Ravi

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Boris would not take the knee for BLM as 'I don't believe in gestures'

Boris Johnson suggested he would not take the knee in support of the Black Lives Matter (BLM) movement, saying people shouldn’t be ‘bullied’ into doing things ‘they don’t necessarily want to’.

The PM said he ‘does not believe in gestures’ during a phone-in on LCB, adding ‘I believe in substance, I believe in doing things’.

He admitted the government needed to do more to improve the lives of black people in the UK but refused to say whether he was a ‘Raab or a Starmer’ – a reference to the foreign secretary who didn’t take the knee and the Labour leader, who did.

‘I would rather see a story of championing success and talking about the opportunities we can open’, the PM said.

He insisted progress had been made on racism in the UK, claiming black representation in the Met Police had ‘massively increased’ during his time as London Mayor and more young black people were getting into the top universities.

He accepted that there ‘are injustices we need to rectify’ but said: ‘I don’t want people to be bullied into doing things they don’t want to do’.

He alleged some police officers felt coerced into taking the knee because their colleagues had done so during recent BLM protests, and that he believed the police should not take the knee as it is not safe for their colleagues.

The symbolic move was popularised in 2016 when NFL star Colin Kaepernick got down on one knee while the US national anthem played before games, to protest against racism and police brutality.

It has become more widespread in the wake of global demonstrations sparked by the killing of an unarmed black man in the US, George Floyd.

Some politicians, including Labour Party leader Sir Keir Starmer and deputy leader Angela Rayner have taken the knee in solidarity with anti-racism protesters in the UK.

Foreign Secretary Dominic Raab came under fire last month for saying he would not take the knee in support of BLM and attributing the origin of the gesture to Game of Thrones.

The PM’s comments have come under criticism from a number of Labour MPs and other critics who have highlighted his past record on making big gestures – including a recent controversial decision to spend £900,000 making over the prime minister’s plane.

He said: ‘I think about this a lot, its something I want to get right, we need to reflect the country we serve and send out a clear powerful signal [to companies]’.

Get in touch with our news team by emailing us at [email protected]

For more stories like this, check our news page.

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China appoints hard-line Hong Kong security chief

China has appointed a hard-line figure as head of its new security agency in Hong Kong.

Zheng Yanxiong is best known for his role in dealing with a protest over a land dispute in the southern Chinese village of Wukan in 2011.

The new agency, answering directly to Beijing, is being set up to enforce a draconian security law passed this week in Hong Kong.

Opponents of the law say it erodes the territory’s freedoms.

The law targets secession, subversion and terrorism with punishments of up to life in prison.

Several leading pro-democracy activists have stepped down from their roles and one of them, one-time student leader and local legislator Nathan Law, has fled the territory.

Separately, one of 10 people arrested using the new law during protests on Wednesday has become the first to be charged under it. Hundreds were detained during the clashes.

The motorcyclist, accused of riding into a group of police carrying a flag calling for the liberation of Hong Kong, was charged with inciting secession and terrorism.

Beijing has dismissed criticism of the law, saying it is necessary to stop the type of pro-democracy protests seen in Hong Kong during much of 2019.

Hong Kong’s sovereignty was handed back to China by Britain in 1997 and certain rights were supposed to be guaranteed for at least 50 years under the “one country, two systems” agreement.

But China has rejected complaints by the UK and other Western nations that it is in breach of these guarantees as interference in its internal affairs.

What do we know about China’s new appointees?

Mr Zheng’s most recent senior position was as secretary general of the Communist Party committee in the southern province of Guangdong.

But he is best known as party boss in the Guangdong city of Shanwei in 2011 during a protest by villagers in Wukan seeking compensation for land requisitioned by the government.

At the time he criticised the villagers for talking to “a few rotten foreign media organisations” instead of the government about their grievances.

“These media organisations will only be happy when our socialist county falls apart,” he said in remarks broadcast on local TV.

The unrest led to a rare concession by the authorities, with the direct election of a popular local leader. However, five years later he was jailed for corruption and the protests were quashed.

Other appointments by Beijing include Luo Huining, who has been made adviser to Hong Kong’s chief executive on the new security law.

Mr Luo currently heads Beijing’s liaison office in the territory. Veteran Hong Kong official Eric Chan will head the territory’s national security commission.

To understand Zheng Yanxiong you need to know about a Guangdong village called Wukan.

In 2011, disaffected locals forcibly expelled government officials from the area, accusing the officials of grabbing their land in a series of corrupt deals with developers.

A blockade ensued and, as part of a negotiated settlement to defuse tensions, the locals were given the right to elect their own council. It became a grass roots democratic exemption in China.

Five years later, the residents – angry that no money had been paid for the stolen land – started marching in the streets again. The situation escalated after their elected leader was taken away by the authorities on what are thought to have been trumped up charges.

The empowered locals were in charge of their own affairs and they believed they could achieve justice. But the Communist Party became fed up with the rebellion and they sent Zheng Yanxiong, who ordered in hundreds of riot police to make mass arrests and seize control. The ‘Wukan experiment’ was crushed.

Since then, Mr Zheng has moved through the ranks, acquiring a reputation for doing whatever is necessary. Now he’s in charge of a new security agency in Hong Kong which operates without any legal restraints whatsoever, and which no other agencies can touch.

What is the security law?

The law is wide-ranging, making inciting hatred of China’s central government and Hong Kong’s regional government offences.

It also allows for closed-door trials, wire-tapping of suspects and the potential for suspects to be tried on the Chinese mainland.

Acts including damaging public transport facilities – which often happened during the 2019 protests – can be considered terrorism.

There are also concerns over online freedom as internet providers might have to hand over data if requested by police.

Hong Kong’s new security law

What has the reaction been from overseas?

US lawmakers have unanimously approved new Hong Kong-related sanctions, with House Speaker Nancy Pelosi saying the law amounted to a “brutal, sweeping crackdown against the people of Hong Kong, intended to destroy the freedoms they were promised”.

Meanwhile, UK Prime Minister Boris Johnson said the passing of the law was a “clear and serious breach” of the 1985 Sino-British joint declaration.

The UK has offered residency, and possible citizenship, to up to three million Hong Kongers in the wake of the law’s implementation.

Numerous others have also expressed strong concerns. Australia revealed that, like the UK, it was considering offering safe haven to Hong Kongers.

China has responded by saying Hong Kong’s affairs are “none of your business”.

However, Cuba – on behalf of 53 countries – welcomed the law at the United Nations Human Rights Council.

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Global banks seeking details of U.S. sanction threat against China individuals for Hong Kong law

HONG KONG (Reuters) – International banks were seeking details on Friday of the scope of U.S. legislation that would penalize them for doing business with Chinese officials who implement Beijing’s sweeping new national security law on Hong Kong.

The U.S. Senate passed the bill unanimously on Thursday, a day after it saw full support in the House of Representatives, in a rare example of bipartisan support that reflects politicians’ concern over the erosion of the Hong Kong’s autonomy following China’s imposition of the law on Tuesday.

The bill calls for sanctions on Chinese officials and others who help violate Hong Kong’s autonomy, and financial institutions that do business with those who are found to have participated in any crackdown on the city.

But it does not lay out which individuals might be included, nor what they would be forbidden from doing.

Banks including Citigroup and Bank of America were among those holding calls on Friday with U.S. colleagues to discuss the potential fallout from the legislation, but few conclusions could be drawn at this stage, sources said.

Spokesmen for the banks declined to comment.

President Donald Trump has not yet indicated if he will sign the bill into law.

“Financial institutions are concerned about the legislation principally because of uncertainty about how the sanctions will be used,” said Nick Turner, a lawyer specializing in sanctions and anti money laundering at Steptoe and Johnson in Hong Kong.

Turner said the main area of uncertainty was around what would constitute a significant transaction, and whether that would prevent a bank providing retail or private banking services to a sanctioned person, as well as which individuals might be named.

The bill calls for the Secretary of State to report to Congress within 90 days of the law’s passage and identify any foreign person who has, or is, materially contributing to undermining Hong Kong’s autonomy.

Within 60 days, the Treasury Secretary must then submit a report identifying those banks that have knowingly conducted a significant transaction with someone named.

“Internally, it’s very difficult for us to take a call on this now and think about its impact without seeing the names of the people and the entities that would be targeted,” said a trade finance banker at a large European bank, who also discussed the bill with colleagues on a call.

“If they name party members who are sitting on the boards of large SOEs (state-owned enterprises), that would create a massive problem,” he added, declining to be identified due to the sensitivity of the matter.

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'Labour no longer stands with Black people – so I'm leaving'

In case you missed it, it took Keir Starmer just a matter of seconds this week to reduce the Black Lives Matter movement to a ‘moment’ – a tone-deaf term that dismissed the validity, necessity and longevity of the Black British collective struggle, during his interview on BBC Breakfast.

As a lifelong Labour supporter and Black working class woman raised in the late 90s/early 00s ex-industrial town of Doncaster, it was the last straw for me.

In my hometown, the legacy of the Labour Party – which has held the constituency since 1983 – always aligned with my values of prioritising the needs of the vulnerable.

After Jeremy Corbyn was elected as the new Labour leader in 2015, I felt inspired by a renewed sense of hope in a future that was ‘for the many not the few’, and joined the party.

It was the first time I felt actively optimistic about British left-wing politics since Tony Blair, whose involvement in the Iraq war I did not agree with.

When Starmer took over this year, I was open to the change in leadership. His voting record on social issues mirrored my values and I was hopeful that this would be reflected in his actions moving forward.

But over the past few weeks, I’ve found myself distancing from the Labour Party at an evolving pace.

The seeds were first sewn when Starmer, who had previously ‘taken a knee’ in solidarity with the Black Lives Matter movement, did not sufficiently call out the racism of the ‘counter protesters’ who marched against BLM protests.

They chanted racist slurs, attacked the police and raised what appeared to be Nazi salutes in the process but instead of condemning these people as racist upholders of white supremacy, Starmer’s main concern was with the violence against police, and not the underlying rhetoric.

This showcased a classic case of performative allyship, which was only cemented further through his interview on BBC Breakfast.

His statement ignored Britain’s collective resentment at our racist history, and the ongoing racial disparities that disproportionately affect Black people today. It suggested that we will ‘get over it’ soon and therefore do not need to be taken seriously.

After the statement went viral, former UKIP leader Nigel Farage, notorious for his unapologetic bigotry, right wing rhetoric and anti-multiculturalism stance, tweeted that he ‘heartily agrees’ with Starmer’s condemnation of the BLM organisation.

I immediately cancelled my Labour Party membership.

My political and social ethics have always been integral to my identity, without a party to represent these views I feel like I’ve lost that sense of belonging that allyship brings. 

I am not the only one to abandon Labour. My social media feeds, WhatsApp groups and DMs sprung to life with likeminded friends telling me they feel equally betrayed. 

I now have a sense of foreboding. In a political landscape where the left are leaning towards the centre/right, who is going to advocate for the most vulnerable people in society?

If the Labour Party is not prepared to listen to the needs of Black people, unapologetically support these and advocate for our rights to be heard, then the party is no longer a safe place for us. You are either with us or you are against us, there is no room for debating our humanity, excusing our oppressors or talking over us. This only puts us in further danger. 

In the 2019 General Election, 64 per cent of BAME voters chose Labour, but in 60 seconds, in my opinion, Starmer successfully managed to isolate an entire community, leaving me and many others politically homeless.

Questioning the validity of the only organisation that advocates for Black people, questions the validity of all Black people.

Starmer’s statement othered us so completely that I no longer feel like we have a home in the party, and as an avid and loyal Labour advocate, this turnaround is humiliating.

Cancelling my membership was a knee-jerk reaction, but I do not regret it. Under no circumstances am I prepared to support a party whose leader has his views endorsed by Nigel Farage – even if it was just once.

Black people are often infantilised as people who, with the right amount of distraction, smoke and mirrors, and bargaining, will forget the racism of our oppressors if offered a meet-in-the-middle solution.

I won’t be forgetting Starmer’s comments, and I won’t be returning to Labour under his leadership.

The plausibility of other left-wing parties and their allyship with the Black community during this time will be telling. 

As the left centres in on what appears to be a strategy to gain voters, who am I, a Black working class woman, meant to vote for?

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COVID recovery vs COVID reality

LONDON (Reuters) – World shares inched towards a four-month high on Friday and industrial bellwether metal copper was set for its longest weekly winning streak in nearly three years, as recovering global data kept nagging coronavirus nerves at bay.

The market rally fuelled by record U.S. jobs numbers had largely blown itself amid a spike in U.S. COVID cases, though the fastest expansion in China’s services sector in over a decade and more stimulus ensured optimism remained.

Chinese shares had charged to their highest level in five years [.SS], helping the pan-Asian indexes to 4-month peaks, so the sight of European markets stalling early on took some traders by surprise.

Currency and commodity markets also had a subdued feel after an otherwise strong week for confidence-sensitive stalwarts such oil, copper </MCU3=LX>, sterling and the Australian dollar, which all struggled on Friday.

“I think infection rates and fears of localised lockdowns have doused some of the enthusiasm,” said Societe Generale strategist Kit Jukes.

“We have three elements now; vaccine hopes, decent data in most places but also the return of infection rates which can make you nervous.”

Against a basket of currencies, the dollar rose slightly in early London trading. It was up less than 0.1% at 97.306 and still firmly on track for its biggest weekly fall since the first week of June.

The euro was down at $1.1226 and though it gained against the safe Swiss franc it fell versus the sometimes commodity-driven Norwegian crown.

S&P 500 futures were down 0.2% but volumes were lower than usual due to a U.S. markets holiday on Friday for Independence Day.

U.S. nonfarm payrolls surged by 4.8 million jobs in June, above the average forecast of 3 million jobs in June, thanks to rises in the hard-hit hospitality sectors.

But economists noted there were caveats to the upbeat headline figures.

The number of permanent job losers continued to rise, increasing by 588,000 to 2.9 million in June while the unemployment rate remains a chunky 7.6 percentage points above its February level. A Deutsche Bank analysis put the U.S. unemployment rate behind all its developed market peers barring Canada.

The recovery also faces more headwinds as a surge of new coronavirus infections prompts U.S. states to delay and in some cases reverse plans to let stores reopen and activities resume.

More than three dozen U.S. states saw increases in COVID-19 cases, with cases in Florida spiking above 10,000.

Nevertheless markets are largely overlooking the spikes, taking the view that overall the situation was still improving overall.

Ten-year German government bond yields are up 5 basis points this week and set for their biggest weekly rise in a month, though they nudged down on Friday to -0.44%. Riskier Italian yields fell to 1.26% as well though, which is their lowest since late March. [GVD/EUR]

Oil prices also eased after an otherwise solid week. Brent crude fell 0.65% to $42.86 a barrel while U.S. crude dropped 0.66% to $40.38 a barrel. Both were around $25 this time two months ago.

Copper prices were poised for a seventh consecutive weekly gain, their longest winning streak in nearly three years, despite a slight easing on the day after top supplier Chile had assured traders about supply.

Three-month LME copper was hovering at $6,040 a tonne, more than $1,500 up from lows it ploughed to in March. [/MET/L]

“The one issue that hangs over all the markets is will we see a surge in secondary infections that will trigger a second wave of national rather than regional shutdowns?” Malcolm Freeman, director of Kingdom Futures, wrote in a note.

(GRAPHIC: China recovery – here)

(GRAPHIC: COVID-19 in U.S. – here)

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French Prime Minister Edouard Philippe, his government resign

President Emmanuel Macron accepted the resignations of the government and the prime minister, the Elysee Palace says.

The French government led by Prime Minister Edouard Philippe and his government have submitted their resignations, which President Emmanuel Macron has accepted, according to the Elysee Palace.

No reason was given in the short statement issued on Friday, but a cabinet shuffle had been widely expected after Macron promised to chart a new course for the last two years of his term.

The government will continue to handle “day-to-day matters” until a new government is formed, the presidency said. The Elysee Palace later said the new prime minister was expected to be named “within hours”.

In French government reshuffles, the prime minister tenders his or her resignation before cabinet appointments but can still be renamed to the position.

It was not immediately clear whether Philippe would be called upon to form the new government.

Municipal elections

Macron’s move to refashion his centrist government comes after voters punished the former investment banker and his party in nationwide municipal elections.

The elections revealed surging support for the Green party and underlined Macron’s troubles with left-leaning voters. The only bright spot for Macron was Philippe’s victory in the northern port city of Le Havre.

With only 21 months until the next presidential election, Macron wants to reposition himself, close advisers say.

It would be a political gamble for Macron to replace Philippe, who is more popular with the public than the president, political analysts say.

The prime minister has shown steadfast loyalty during waves of unrest and could emerge as a presidential rival in 2022.

But keeping Philippe in office could be problematic too. It could suggest that Macron was too weak to let go of his prime minister and that his young party lacked the depth to allow for a full-blooded cabinet overhaul.

Moreover, Macron poached Philippe from the centre-right opposition and holding onto him would complicate winning back leftist voters.

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Pound heads for first weekly win against dollar in four

LONDON (Reuters) – Sterling was headed for its first positive week in four against the dollar on Friday, holding close to the $1.25 mark as a week of negotiations between Britain and the European Union ended on what investors called an optimistic note, with meetings expected to resume next week.

Analysts said the pound’s slip in morning trading in London was largely due to some spillover of political uncertainty in Europe, with the resignation of French prime minister Eduoard Philippe fuelling speculation of a cabinet reshuffle.

Brexit talks this week between Britain and the EU ended early on Thursday, with a meeting between the chief negotiators on Friday cancelled.

The EU’s chief negotiator, Michel Barnier, on Thursday said serious divergences remained between the two sides after talks this week on their future relationship. He also said in a statement that the EU continued to believe that an agreement was possible and in everyone’s interest, but its key demands for an economic partnership were unchanged.

“Ahead of a new round of talks next week, the two parties have reportedly softened their stances on a few issues and took steps towards a general compromise,” said strategists at ING Bank.

By 0817 GMT, the pound was trading flat to the dollar at $1.2464. GBP=D3

Against the euro, it was down 0.06% at 90.16 pence. EURGBP=D3

Sterling has risen 1.2% against the dollar this month, after losing 2.7% in June.

“We’re seeing some of the political uncertainties in Europe – around the French cabinet reshuffle – spilling over into the pound,” said Viraj Patel, FX and global macro strategist at Arkera, adding that he expected a very quiet end to the week with FX markets broadly flat given a U.S. holiday and thin trading backdrop.

Implied volatility on the pound – as shown by options markets – remains elevated as compared to other currencies.

“The next 3 months are likely to see the pound subject to heightened Brexit headline risks and it’s not unusual to see FX markets tentatively price in some premium for future expected volatility,” Patel said.

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Merkel on brink: Chancellor warned of economic collapse amid US threat to withdraw troops

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Angela Merkel in June was warned Donald Trump is considering removing over one-third of US troops from bases across Germany. The US Government has yet to confirm whether they will proceed with the plan but the Chancellor has been warned severe economic consequences if Mr Trump gives the go-ahead. Kaiserslautern, southwest Germany, has been heavily depending on the several air and army bases littering the area but mayor Klaus Weichen admitted the President’s threat is “very worrying” for the economy.

Speaking to France 24, Mr Weichen said: “The army employs around 6,000 locals.

“And then there’s the Americans’ spending power, in hotels and restaurants and businesses of all kinds. It’s all very worrying.”

Kaiserlautern and nearby towns have been home to over half of US soldiers based in Germany and the presence of troops generates an estimated $1 billion every year.

The US Army and Air Force began building their presence in what they dubbed K-Town between 1950 and 1955, and have since become the largest US military community outside of the United States.

JUST IN: Emmanuel Macron power grab: Edouard Philippe resigns as French president plots major move

The Department of Defense (DoD) has yet to clarify what their plans are for German-based soldiers but the prospect of their departure has already sparked major concerns among local businesses.

Tailor Sadin Kocaaslan said around 98 percent of his business is connected to the US Army and the US Air Force, fuelling fear the withdrawal of troops could leave Kaiserlautern a “ghost town.”

Mr Kocaaslan said: “We hope it’s a joke of some kind. He says a lot of things and then something different the next day.

“In any case, if they leave, Kaiserslautern will be a ghost town.”

READ MORE: Merkel fury: German Chancellor urges EU to prepare for no-deal Brexit in latest outburst

Christine Schneider, the head of the local German-American Women’s Group, said there is a lot of questions bouncing around the German and US communities but little answers.

Mrs Schneider said: “I work for the Americans. Everyone is asking a lot of questions, everyone is worried, and you can feel it.

“But for now, all we can do is wait for an official decision and I hope the damage won’t be major.”

According to the DoD, Kaiserslautern is home to over 50,000 military personnel and their families.

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Richard Grenell, the former US Ambassador to Berlin, told daily Bild Zeitung President Trump wanted to send a clear message to Chancellor Merkel that “American taxpayers are getting a little bit tired of paying too much for the defence of other countries”.

Mr Grenell said the US leader had signalled to Mrs Merkel his intention at the 70th commemoration of NATO’s founding in August 2019 but he had been dismissed widely as a “PR stunt”.

He added: “We went to the Nato summit in London last September, and we talked about the troop withdrawal then.

“No one should be surprised that Donald Trump is bringing the troops home.”

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