MacroScope

EU on Russia sanctions: slowly, slowly

Ukraine's President Poroshenko and Dutch ambassador to Ukraine Klompenhouwer commemorate victims of Malaysia Airlines Flight MH17 outside the Dutch embassy in Kiev

EU foreign ministers meet to decide how precisely to deploy sanctions agreed 10 days ago to hit Russian companies that help destabilise Ukraine and to block new loans to Russia through two multilateral lenders.

The EU foreign ministers are tasked with preparing a first list of people and entities from Russia that would be targeted. The number of individuals and companies to be penalized is up for grabs so there is scope to adopt a tougher posture.

The public statements of EU leaders have made it sound like a more dramatic move is possible. Could that be the “sectoral” sanctions that Washington has pushed for which could deliver a really serious blow to the already flatlining Russian economy? Well no, not yet. That would require another summit of leaders. The next one is set for the end of August although an emergency meeting is not out of the question and today’s meeting could give a nod in that direction.

Russia provides up to a third of the EU’s energy needs. Sweeping sanctions will inflict pain on the imposers too – on London’s dominant financial centre, on German commerce, on Italian energy security. Are they up for it? And will France give up on its 2.1 billion euros contract to sell helicopter carriers to Moscow?

French President Francois Hollande may have given a first sign of movement last night, saying a decision on whether to deliver a second Mistral carrier to Russia will depend on Moscow’s attitude over the Ukraine crisis. For the second delivery to be cancelled, EU sanctions would have to be decided at the level of heads of state and government, a French government official said. London is talking up the prospect of a defence export ban while saying it would be prepared for its financial sector to take a hit.

Sanctions tighten

Britain's PM Cameron, Portugal's PM Passos Coelho, Germany's Chancellor Merkel and Finland's PM Stubb attend an EU leaders summit in Brussels

EU leaders failed to get anywhere on sharing out the top jobs in Brussels last night but did manage another round of sanctions against Russia.

This time they will target Russian companies that help destabilize Ukraine and will ask the EU’s bank, the European Investment Bank, to suspend new lending for Russia and seek a halt to new lending to Russia by the European Bank for Reconstruction and Development.

That represents a significant stiffening of its measures though still some way short of the United States which yesterday imposed its most wide-ranging sanctions yet on Russia’s economy, including Gazprombank and Rosneft as well as other major banks and energy and defence companies.

Fed and BoE to markets: pay attention to pay

A bookie holds a wad of cash on the third day of the Cheltenham Festival horse racing meetingIt is more than a bit ironic that those paid the most to pay attention to incoming data aren’t paying enough attention to pay.

Both Bank of England Governor Mark Carney and Federal Reserve Chair Janet Yellen have dropped many hints in speeches and public policy statements over the past several months that wage inflation likely will play an important role in any decision to raise interest rates.

Carney also made clear in parliamentary testimony on Tuesday that his interest rate rise warning last month that took so many off guard was a deliberate attempt to inject some volatility back into a very sleepy and complacent interest rate futures market.

New EU takes shape

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The new EU aristocracy will be put in place this week with the European Parliament to confirm Jean-Claude Juncker as the next European Commission President today and then EU leaders gathering for a summit on Wednesday at which they will work out who gets the other top jobs in Brussels.

Although Juncker, who will make a statement to the parliament today which may shed some light on his policy priorities, is supposed to decide the 27 commissioner posts – one for each country – in reality this will be an almighty horse-trading operation.

Current best guesses – though they are just guesses – are that despite a willingness among some to play nice with the Brits, Prime Minister David Cameron may lose out again having voted against Juncker at a June summit. He is seeking one of the big economic portfolios; internal market, trade or competition.

Bank of England, the first mover?

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After the European Central Bank kept alive the prospect of printing money and the U.S. economy enjoyed a bumper month of jobs hiring prompting some to bring forward their expectations for a first U.S. interest rate rise, the Bank of England holds a monthly policy meeting.

There is no chance of a rate rise this time but the UK looks increasingly nailed on to be the first major economy to tighten policy, with the ECB heading in the opposite direction and the U.S. Federal Reserve still unlikely to shift until well into next year. Minutes of the Fed’s last meeting, released yesterday, showed general agreement that its QE programme would end in October but gave little sign that rates will rise before the middle of 2015.

The British economy is growing fast and its housing market has been running red hot – prices in London have shot up nearly 26 percent from a year ago – though the BoE says rate rises are not the first tool to deal with that. Britain’s closely-watched RICS housing survey, released overnight, showed signs that some of the heat is starting to come out with its house price balance easing back.

ECB: talk but no action

EThe European Central Bank holds its monthly policy meeting and after launching a range of new measures in June it’s a racing certainty that nothing will happen this time. However, ECB President Mario Draghi has plenty of scope to move markets and minds in his news conference.

We are still waiting for details of the ECB’s new long-term lending programme which is supposed to be contingent on banks lending the money on to companies and households. Last time they got a splurge of cheap money, the banks largely invested in government bonds and other financial market assets. With euro zone yields now at record lows, the ECB would not like to see a repeat.

Draghi will certainly be asked to clarify what looked like a new attempt at forward guidance. Last month, the ECB offered up new four-year loans to banks, and extended its offer of unlimited liquidity to the end of 2016.

Of Iraq and Ukraine

Barack Obama’s message that any military support for Iraq’s besieged government is contingent on Prime Minister Nuri al-Maliki taking steps to broaden his Shi’ite-dominated government may be having an impact.

Just hours after Maliki’s Shi’ite allies vowed to boycott any cooperation with the biggest Sunni party and his government had accused Sunni neighbour Saudi Arabia of backing “genocide”, Maliki broadcast a joint appeal for national unity alongside Sunni critics of his Shi’ite-led government.

They have tried and failed to come together before but Shi’ite, Sunni and Kurdish leaders met behind closed doors and then stood somewhat frostily before the cameras as Maliki’s predecessor read a statement denouncing “terrorist powers” and supporting Iraqi sovereignty.

Weak UK inflation casts doubt on interest rate hike this year

 

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Bank of England Governor Mark Carney shocked markets last week, saying interest rates could rise sooner than expected.

At first glance, the latest UK inflation data suggest they might not.

Inflation has nearly halved to 1.5 percent in May from 2.9 percent last June. And wage inflation is much lower.

While still well above the euro zone, where inflation has tumbled to 0.5 percent, keeping alive the real risk of deflation, the latest UK inflation rate fell below even the lowest forecast in a Reuters poll.

Common cause for Washington and Tehran in Iraq?

Iraq is going up in flames and there appears to be no question of the West putting boots back on the ground in contrast to 2003 when the United States and Britain invaded to topple Saddam Hussein and set in train a decade of chaos that has now exploded again.

Iraq’s most senior Shi’ite Muslim cleric has urged his followers to take up arms against a full-blown Sunni militant insurgency to topple Shi’ite Prime Minister Nuri al-Maliki. The chances of ISIL militants taking heavily armed Baghdad are slim but that doesn’t mean conflict will not continue and, with Iraqi Kurdish forces seizing control the oil hub of Kirkuk just outside their autonomous enclave in the north, the prospect of the country splitting along sectarian lines is real.

Over the weekend, ISIL’s advance on Baghdad slowed but spread northwest, with Sunni militants seizing Tal Afar, a town close to the Syrian border.

UK rate rise this year? Possible, but not certain yet

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“It could happen sooner than markets currently expect.”

That was the bomb of a headline Bank of England Mark Carney dropped in a speech on Thursday that suggested a significant change in tone at the bank.

So far, Carney has seemed comfortable with keeping rates at a record low of 0.5 percent for another year. That has been the forward guidance markets have been following.

But are many now convinced that Bank Rate will go up earlier?

Not yet, but some.

Given that Carney’s remarks come only a month after he outlined a dovish outlook for rates in the May Inflation Report, he took many by surprise, sending sterling to just under $1.70 and rallying to less than 80 pence per euro.