ECB uncertainty

March 28, 2014

For European markets, Germany’s March inflation figure is likely to dominate today. It is forecast to hold at just 1.0 percent. The European Central Bank insists there is no threat of deflation in the currency area although the euro zone number has been in its “danger zone” below 1 percent for five months now.

Having appeared to set a rather high bar to policy action at its last meeting, this week the tone changed. Most notable was Bundesbank chief Jens Weidmann, normally a hardliner, who said printing money was not out of the question although he would prefer negative deposit rates as the means to tackle an overly strong euro.

That looked like a significant shift although he did stress there was no need for imminent action.

Has something changed? Certainly the currency seems to be focusing minds though it’s probably too early for anything dramatic at next week’s policy meeting. With inflation running at just 0.7 percent and the euro near $1.40 – buoyed by emerging market outflows – further currency appreciation would cut import prices in a way that will push inflation lower still.

Weidmann speaks again this afternoon.

China’s Xi Jinping has said little during his week travelling Europe but will hold a news conference with Germany’s Angela Merkel later in the day.
As we reported from sources yesterday, Frankfurt will become the first hub for yuan payment transactions in Europe with the German and Chinese central banks set to seal the deal today. That’s one in the eye for London which has been pushed hard as the yuan offshore trading centre by the British government and will sign its own agreement next week.

Whether he likes it or not, Xi is also a key player in the Ukraine crisis. Beijing has stayed studiously to one side of the Ukraine crisis, as is its wont, and Moscow still has high hopes of a huge natural gas supply deal with China that is apparently close after years of negotiations.

Beijing has said sanctions are not the way forward but it abstained rather than voted against a U.N. Security Council resolution that declared the Crimea referendum was invalid. Xi called for a political solution earlier in the week but did not harden China’s position towards Moscow while making a vague offer of help to Ukraine.

After a brief wobble, Ukraine’s parliament last night passed a law accepting austerity measures demanded by the IMF in return for a bailout which the Fund hopes will total $27 billion.

Domestic gas prices will rise by a vicious 80 percent but the prospect of default and financial chaos has presumably been banished and the IMF said there was no need for debt restructuring.

In years to come, this could be looked upon as a turning point for the country if it can elect credible leaders in May who will bear down on corruption and press on with economic reforms. Former prime minister Yulia Tymoshenko threw her hat into the presidentiai ring yesterday.

All that presumes that Russia does not do its best to hinder its neighbour’s recovery while to turn around Ukraine’s uncompetitive Russia-directed industry towards the west will be a mighty task. But for Europe and the United States, there is a clear political incentive to make a success of this.

After the best part of a week in Europe, Barack Obama will visit Saudi Arabia and is expected to seek to ease concerns that the United States is neglecting an old ally after top Saudis objected to a growing rapprochement between Washington and their rival Iran.

Turkish municipal elections loom on Sunday with the tentacles of a corruption saga that has embroiled Prime Minister Tayyip Erdogan’s government spreading ever further.

Yesterday, Erdogan denounced as “villainous” the leaking of a recording of top security officials discussing possible military action in Syria to the video-sharing site YouTube and ordered the shutdown of the site.

The OECD publishes its annual sovereign borrowing outlook. It will gauge the supply of “safe” sovereign assets and the challenges for debt managers of the continuing volatility in global markets, combined with uncertainties about the timing of the U.S. Federal Reserve tapering.

It’s ratings Friday and we’ve had a clutch of reviews already. S&P has lowered Nigeria’s credit outlook to negative while upgrading its view of Hungary to stable, saying it could upgrade if Viktor Orban’s government initiates “pro investment” policies. S&P has also affirmed Luxembourg and Sweden at ‘AAA’ and Austria at ‘AA+’. Fitch has confirmed Finland’s ‘AAA’ status.

Moody’s is due to pronounce on Russia later, which could make for interesting reading.

Romania’s central bank is expected to keep rates at a record low 3.5 percent today and through this year.

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