MacroScope

Davos Day Two — Rouhani, Lew and Lagarde

By Mike Peacock
January 23, 2014

Day one in Davos showed the masters of the universe fretting about Sino-Japanese military tensions, the treacherous investment territory in some emerging markets and the risk of a lurch to the right in Europe at May’s parliamentary elections which could make reform of the bloc even harder.

Today, the focus will be on Iranian President Hassan Rouhani (and his main detractor, Israel’s Netanyahu). Presumably he’s there to woo the world of commerce now sanctions are to be relaxed in return for Tehran suspending enrichment of uranium beyond a certain level. Anything he says about Syria’s peace talks, which have so far been more hostile than conciliatory, will instantly be headline news.

Other big name speakers are U.S. Treasury Secretary Jack Lew, IMF chief Christine Lagarde, who is going around warning about the threat of European deflation, Australian premier Tony Abbott, who is running the G20 this year, and a session featuring the BRICS finance ministers.

There is clearly a pervading sense of caution, if not alarm, about emerging markets. That aside, with the U.S. recovering and the existential threat to the euro zone over, perhaps delegates will look most nervously to the east.

Japan has printed huge amounts of money but is still to follow through on promised structural reforms to counter the drag of an ageing and shrinking population and to reduce massive public debts. China’s ability to take excess credit out of the economy without causing a crash is perhaps of even greater importance.

And if those two powers continue to rub each other up the wrong way a over a territorial dispute, Japanese Prime Minister Shinzo Abe’s visit to a shrine that critics say glorifies Japan’s wartime past and a new Chinese air-defence zone, then it is all that much more worrying.

Ukraine is once again a huge potential flashpoint. At least three anti-government protesters were killed yesterday and talks between opposition leaders and President Viktor Yanukovich fell apart without agreement, prompting his three main opponents to declare they were ready to face police bullets. The idea that Russia’s $15 billion bailout had taken the sting out of the country’s crisis is now clearly for the birds.

Turkey is another worry for investors. The lira has plumbed a new record low versus the dollar this morning but the government has succeeded in selling a $2.5 billion 10-year Eurobond which it say means 50 percent of 2014’s funding needs have been met already. Interestingly, the Treasury also said 66 percent was snapped up by U.S. investors. It did, however, pay a higher premium to U.S. Treasuries than a year ago.

Prime Minister Tayyip Erdogan and President Abdullah Gul will hold a regular weekly meeting. No statement is generally released afterwards but the big question is whether Gul will approve or veto a government law reforming a key judicial council, a bill seen by its opponents as an attempt to muzzle the judiciary in response to a corruption investigation which has dragged in government ministers.

On the data front, flash PMIs for the euro zone, Germany and France will give an early snapshot of how Europe has started the new year in economic terms. After Germany’s ZEW sentiment index for January unexpectedly fell, any sign of faltering in these reports will grab attention.

France, which has been the laggard  of late to the point where some have saddled it with the “sick man of Europe” label, will sell up to 9.7 billion euros of fixed-rate medium-term notes and inflation-linked debt at auction.

Our polling unit will land a survey of economists after another tumble in the UK unemployment rate has them scrambling to bring forward their expectations of a first interest rate rise. That is the last thing the Bank of England want so what might it do next. Shift its unemployment target? Effectively rule it null and void? BoE policymaker Ian McCafferty is speaking shortly and his colleague Paul Fisher a little later.

More grist to the mill – the Society of Motor Manufacturers and Traders says British car production reached its highest level since 2007 last year.
Italian 5-Star Movement leader Beppe Grillo gives a rare talk to foreign press. The head of the anti-establishment party which scored a huge triumph in last year’s election but has since seen its star wane is still a key player as Italian politicians try and thrash out electoral reforms that will provide for more stable government in future.

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