MacroScope

Odds on Britain leaving EU shift again

Kiev has appealed for Western help to stop Moscow annexing Crimea, where a referendum on joining Russia will be held on Sunday. Ukrainian Prime Minister Arseny Yatseniuk will take that message to Washington and the United Nations.

The West says the referendum is illegal. U.S. lawmakers are preparing sanctions against Russia and European Union leaders could impose penalties, such as bans on visas for key Russian officials, as early as Monday if Vladimir Putin does not come to the negotiating table. There is no sign that he will and there is no question of western force being deployed.

Germany’s Angela Merkel is in Warsaw for talks with Prime Minister Donald Tusk. Poland has been pressing for more aggressive action while Germany – with its deep economic and energy ties to Russia – is more reluctant. But it appears the EU is moving closer to imposing sanctions.
Ed Miliband, leader of Britain’s opposition Labour party, has stated in today’s FT that he would only hold an EU referendum if there was a new transfer of power from London to Brussels.

That ain’t going to happen – if there is any treaty change it will be focused on binding the euro zone closer together and Britain sits outside that. So if Labour wins next year’s election, or rules in coalition with the pro-EU Liberal Democrats thereafter, there will not be an in/out vote on the UK’s membership of the EU before 2020.

Now I call this important. The Conservative party is wedded to a 2017 vote having tried to repatriate powers from Brussels first. UKIP, the resurgent anti-EU party, had pushing Labour into a referendum commitment as its main goal.

A small step back?

A reported 0300 GMT deadline, which Russian forces denied had been issued, for Ukraine’s troops to disarm in Crimea or face the consequences has passed without incident and in the last hour President Vladimir Putin has ordered troops that took part in military exercises in western Russia to return to base.

That has helped lift the euro but the situation remains incredibly tense. Russia’s stock market is up a little over two percent and the rouble has found a footing but they are nowhere near clawing back Monday’s precipitous losses.

The West may have no military card to play – and its ability to impose meaningful sanctions is untested as yet – but the markets reminded Putin in no uncertain terms yesterday that there is a price to pay for war mongering.

Ukrainian tipping point

Violence in Ukraine has escalated to a whole new level. The health ministry says 25 people have been killed in fighting between anti-government protesters and police who tried to clear a central square in  Kiev. The crackdown, it seems, has been launched.

President Viktor Yanukovich met opposition leaders for talks last night but his opponents, Vitaly Klitschko and Arseny Yatsenyuk, quit the talks without reaching any agreement on how to end the violence and said they would not return while blood is being shed.

The opposition are pressing for changes to the constitution which would curb the powers of Yanukovich and allow for the appointment of a technical government. Yanukovich is yet to name a new prime minister. If he names a hardliner, that could prove incendiary.

Cold War chill over Ukraine

Dramatic twist in the Ukraine saga last night with a conversation between a State Department official and the U.S. ambassador to Ukraine posted on YouTube which appeared to show the official, Assistant Secretary of State Victoria Nuland, deliberating on the make-up of the next government in Kiev.

That led to a furious tit-for-tat with Moscow accusing Washington of planning a coup and the United States in turn saying Russia had leaked the video, which carried subtitles in Russian. A Kremlin aide said Moscow might block U.S. “interference” in Kiev.

Nuland is due to give a news conference today after her visit to Kiev.

Vladimir Putin is likely to meet Ukrainian President Viktor Yanukovich in Sochi as the Winter Olympics get underway. It could be awkward for Yanukovich’s opponents if they look like western pawns.

Forward guidance is not fully living up to its name

Britain’s economy may have seen one of the fastest rebounds among industrialized nations last year, but half of 56 economists polled by Reuters think the Bank of England has lost some credibility over its handling of the forward guidance policy.

The policy – an advance notice that monetary conditions will not be tightened too fast or too soon – was a way of managing market bets, at a time when the scope for stimulating economies through conventional interest rate cuts was limited.  Many say it was a necessary transition from the ultra-loose rate policy of recent years to a more normal post-crisis one. Indeed, the use of verbal intervention to guide monetary policy has been on the rise in recent years, as shown by this graphic on the Federal Reserve. 

But the BoE’s forward guidance has come under a lot of criticism and its results have been mixed, as highlighted by this Reuters story  and FT blog.

The UK economy – what a difference a year makes

This time last year, an imminent sovereign credit rating downgrade and a 1-in-3 chance of a new recession dominated talk on Britain’s economy.

To say 2013 turned out better than expected - at least by the simple yardsticks of economic growth and unemployment - would be an understatement, then, even if tepid wage growth, weak productivity and a rising cost of living still dog the economy.

None of the 63 forecasters polled by Reuters in Jan last year predicted that growth for the 2013 as a whole would hit 1.9 percent, as official data showed on Tuesday.

Crunch day for Turkey, and Ukraine

Hard to look beyond Turkey today. The central bank will issue its quarterly inflation report and has called an emergency policy meeting thereafter and will deliver a verdict at midnight local time. All very cloak and dagger.

The central bank, under heavy political pressure, has so far not raised interest rates but is instead burning through its reserves to defend the tumbling lira with only limited success.

It has floated the idea of “additional tightening days” when it will fund the interbank market at a higher rate, which is essentially monetary tightening by the back door. But in the throes of a full-on emerging market selloff it’s hard to see that doing the trick.

Iran and Japan in focus at Davos

Lots of action in Switzerland today with the annual get-together of the great and good at Davos getting underway and Syrian peace talks commencing in Montreux.

On the latter, few are predicting anything other than failure, a gloom that Monday’s chaotic choreography did nothing to dispel.
U.N. chief Ban Ki-moon Ban first offered Iran a seat at the table, prompting a threat to pull out by Syrian opposition groups which led to Washington demanding the invitation to Tehran be withdrawn. In the end, Ban did just that.

The release of thousands of photographs apparently showing prisoners tortured and killed by the government reinforced opposition demands that Bashar al-Assad must quit and face a war crimes trial. The president insists he can win re-election and wants to talk about fighting “terrorism.”

EU ratings day: Portugal modest thumbs up, Dutch unscathed, Ireland awaited

Friday is European ratings day since EU rules took force requiring ratings agencies to say precisely when they will make sovereign pronouncements and to do so outside market hours.

S&P has already shifted its outlook on Portugal’s rating from creditwatch negative to negative. The rating remains at BB, one notch below investment grade. That sounds obscure but it’s actually something of a vote of confidence though probably short of what the market had been hoping for.

The ratings agency said it expects Lisbon to meet its budget deficit target this year based “partly on indications that the economy has been showing signs of stabilization since mid-2013” – another fillip as Lisbon tries to follow Dublin out of the bailout exit door this year.

Spain ascendant?

Spain appears to be on the road to recovery, if you can call it that with around a quarter of the workforce without a job.

The government says growth hit 0.3 percent in the final quarter of the year, the second quarterly expansion in a row, and may upgrade its forecast for 0.7 percent growth in 2014.

Its borrowing costs have tumbled to four-year lows in a new year bond rally and today Madrid will try to cash in by selling up to 5.5 billion euros of bonds following an above-target sale last week.