Decision day in Israel

March 17, 2015

Combination picture of Isaac Herzog, co-leader of the centre-left Zionist Union party, and Israeli Prime Minister Benjamin Netanyahu

Israelis are going to the polls with the last opinion polls suggesting momentum had shifted to opposition Zionist Union after weeks of running neck-and-neck with Prime Minister Benjamin Netanyahu’s Likud.

Forecast to win around 25 seats to Likud’s 21 in the 120-member parliament, Zionist Union hopes the gap will be wide enough to persuade Israel’s president to ask its leader, Labour party chief Isaac Herzog, to try to form a coalition government.

Netanyahu has talked of a “huge, worldwide effort” to ensure he loses. The world is certainly watching, not least Washington and Tehran given Netanyahu’s strident opposition to any deal over Iran’s nuclear programme.

The U.S. administration’s ties with Netanyahu, already strained by his opposition to nuclear negotiations with Iran, were stretched further when he spoke to U.S. Congress earlier this month at the invite of Republicans.

If Herzog gets the first shot at forming a coalition and fails, Netanyahu – who may have more potential partners to go for – could yet remain as premier.

After nearly five hours of talks between U.S. Secretary of State John Kerry and Iranian Foreign Minister Mohammad Javad Zarif on Monday, a senior U.S. official told reporters that it was not clear if an end-March deadline for a framework nuclear deal could be met but that both sides would work through the end of the month if needed to secure a deal. Talks are expected to resume today.

Zarif said that on some issues the two camps had moved closer but not on all. Six world powers — the United States, Germany, France, Britain, Russia and China — are trying to reach a framework agreement with Iran by the end of the month that would curb Tehran’s most sensitive nuclear activities for at least 10 years in exchange for gradual easing of some sanctions.

The parties have set a June 30 deadline to finalise all the technical details. Western officials say privately that overcoming disagreements on some of the remaining sticking points would be very difficult.

For the markets, all eyes will be on the Federal Reserve’s meeting on Wednesday and whether it flags a looming U.S. interest rate rise or whether the surging dollar – on the back of the European Central Bank printing lots of euros while U.S. policy is about to tighten – will put it off for a while longer. The Bank of Japan maintained its massive stimulus programme earlier and cut its inflation outlook, suggesting there may be more to come.

There is plenty of central bank action on our patch too this week and perhaps most intriguing is the Turkish central bank’s meeting today.

It has been in rate-cutting mode but found its efforts attacked by President Tayyip Erdogan who has demanded more dramatic action even though inflation is high. The lira, already under pressure against the strong dollar, has tumbled sharply as investors question the independence of the central bank and the position of its head, Erdem Basci.

Basci and Erdogan met last week to iron out their differences and may have secured a truce if not a meeting of minds. Erdogan has previously denounced defenders of high interest rates as “traitors”, suggesting the chances of forging any common understanding are slim. A Reuters poll of economists predicted no change from the central bank today.

The Turkish central bank’s hand must be strengthened by increasing its credibility, Finance Minister Mehmet Simsek said on Saturday.

ECB President Mario Draghi has consistently demanded euro zone governments step up the pace of structural economic reform and integrate more closely in fiscal terms.

German Chancellor Angela Merkel will meet Draghi in Berlin for talks on the euro zone today with an EU summit looming at the end of the week which is supposed to agree on the economic policy of the 28-nation bloc for 2015, setting guidelines on fiscal consolidation, investment and so on.

In a speech last night, Draghi called for a “quantum leap” in European integration with countries sharing more sovereignty, using the time he has bought them with the ECB’s quantitative easing programme. That looks like a big ask though it’s hard to argue with his assessment that euro zone countries had not yet converged sufficiently to dispel doubts about the bloc’s cohesion.

The main figure of the day will be Germany’s ZEW sentiment index for March. Most German data has surprised on the upside so far this year. Zero inflation, cheap energy, a tumbling euro, hefty sectoral pay rises and the fact that more German bonds than any others will be bought under the ECB’s QE programme all point to solid growth for Europe’s largest economy this year.

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