MacroScope

Britain back on board for action in Iraq

An Iraqi SWAT trooper covers his ears as he fires a mortar bomb during clashes with Islamic State militants, north of Muqdadiyah

U.S. air strikes in Syria continued overnight with a monitoring group saying at least 14 Islamic State fighters were killed.

Having sat out so far, Britain said it would join strikes against militants but only in Iraq for now – which has asked for such help – not Syria. IS holds swathes of land in both countries.

Parliament is to reconvene on Friday and, unlike last year when action to stop Bashar al-Assad using chemical weapons against his own people was voted down, all the main parties are now broadly in support. Prime Minister David Cameron’s cabinet will meet today to finalise what they will put to parliament tomorrow.

Washington has secured the support of Saudi Arabia, UAE, Jordan, Bahrain and Qatar – crucial Arab support which was largely absent for the 2003 invasion of Iraq.

Turkey appears to be inching toward greater involvement after the IS group freed 46 Turkish hostages but it remains unclear how far it will go. Its long border with Syria make it strategically vital and it is home to a major U.S. base at Incirlik.

A long haul

U.S. Navy handout shows EA-6B Prowler attached to the Garudas of Electronic Attack Squadron 134 landing aboard the aircraft carrier USS George H.W. Bush after conducting strike missions against Islamic State targets, in the Gulf

Having largely sailed through this year’s choppy (to say the least) geopolitical waters, markets are a little discomfited by U.S. air strikes in Syria targeting Islamic State militants … though only a little.

The U.S. military said Monday’s onslaught was just the start, suggesting it could take years to “degrade and destroy” the group, as Washington puts it. It remains to be seen how effective air attacks alone, which have been conducted in Iraq for some time already, will be in that regard.

Many of the potential protagonists will be at the United Nations General Assembly in New York where President Barack Obama will try to rally more nations behind his drive to take on IS.

End game in east Ukraine?

A Ukrainian serviceman sits on a military armoured vehicle near Donetsk

Ukrainian government forces say they are preparing for the final stage of recapturing the city of Donetsk from pro-Russian separatist rebels after shelling its outskirts and making significant gains over the weekend.

The city faces increasing shortages of food, water and electricity. Vladimir Putin must now decide whether to leave the rebels to their fate or step up his support.  Kiev said on Saturday it had headed off an attempt by Russia to send troops into Ukraine under the guise of peacekeepers accompanying a humanitarian convoy sanctioned by the Red Cross. Moscow dismissed the allegation as a “fairy tale”.

On a weekend telephone call, U.S. President Barack Obama and German Chancellor Angela Merkel agreed that any Russian intervention in Ukraine, even under purported ‘humanitarian’ auspices, without the express authorization of Kiev was unacceptable and would provoke “additional consequences.”

When Mario met Jean-Claude

European Central Bank President Draghi and Eurogroup President -Juncker talk during a news conference in Nicosia, Cyprus

A day before the European Central Bank’s monthly policy meeting, ECB President Mario Draghi will travel to Luxembourg for talks with incoming European Commission president Jean-Claude Juncker. Oh to be a fly on the wall.

Some in the ECB are concerned that ultra-low sovereign borrowing costs and Draghi’s “whatever it takes” promise has relieved pressure on euro zone governments to carry on with structural economic reforms.
Juncker has signalled he is comfortable with a Franco-Italian drive to focus on growth and job creation rather than cutting debt.

ECB policymakers would probably be happy with that if it came in tandem with reforms to make euro zone economies more competitive. But it is worried about slippage.

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.

Erdogan on the move

Turkey's PM Erdogan walks to his plane at Esenboga Airport in AnkaraTurkey’s ruling AK party is due to announce its presidential election candidate. Prime Minister Tayyip Erdogan is widely expected to announce his presidential bid, and then emerge victorious in the polls after a 40-day election campaign. Polls give Erdogan around 55 percent of the vote and a 20 point lead.

Under Erdogan, Turkey has made great strides economically and diplomatically but some if not much of that progress has been tarnished by a crackdown over the past year on anti-government protests and a purge of the judiciary and police in response to corruption charges against his acolytes which the premier says represent a plot by shadowy forces to oust him.

If he wins he is expected to exercise far more power than his presidential predecessor. Aides have said he would rule with a “council of wise men” made up partly of close allies and would oversee top government business, effectively sidelining some ministries and ministers.

The Mark and George show

The Mansion House dinner in the City of London is one of Britain’s big set-pieces of the year featuring speeches by Bank of England Governor Mark Carney and finance minister George Osborne.

Carney will be speaking a week before the Bank’s Financial Policy Committee meets and is expected to road test its new tools to calm the housing market. Among other measures, the BoE could recommend caps on the size of home loans granted in relation to a property’s value or a borrower’s salary.

There have been some signs of demand for mortgages slowing of late but London – the real hotspot – is being fuelled by an influx of foreign money which does not require a home loan to buy. The FPC could also suggest the government curbs its “Help to Buy” scheme which helps Britons get on the property ladder.

PMIs next signpost for ECB

Following a mixed bag of euro zone GDP data last week which showed Germany charging on and Spain holding its own but France stagnating and Italy, Portugal and the Netherlands slipping back into contraction, flash PMI surveys for the euro zone, Germany and France certainly have the power to jolt the markets today.

As things stand, there seems little to dissuade the European Central Bank from loosening policy next month. Five senior sources told us it was  preparing a package of policy options for its early June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.

Bundesbank chief Jens Weidman speaks later. He told a German newspaper it was not yet certain that action would be taken in June. The three PMI readings are not expected to move much from April with the French numbers lagging those of the euro zone and Germany.

Smoke signals from the Bank of England

Given the silence that attends Bank of England policy meetings which result in no change of course, today’s quarterly inflation report is the main chance to hear the latest thinking. Governor Mark Carney will talk to the media for an hour or so after its release.

The ongoing strength of economic data means the odds of a first interest rate rise this year are narrowing and one could certainly come before May 2015 elections, an unwelcome prospect for the government.

The main imponderable is how much spare capacity there is in the economy, which would allow further growth without feeding inflation pressures. There are differing views on that with no one quite sure how much activity was permanently destroyed by the financial crisis.

Talking the talk

European Central Bank President Mario Draghi delivers a speech in Amsterdam which will fixate the markets following his recent statement that a stronger euro would prompt an easing of monetary policy.

Most notably via his Clint Eastwood-style “whatever it takes” declaration the best part of two years ago, Draghi has proved to be peerless in the art of verbal intervention. But even for him there is a law of diminishing returns which may require words to be backed up with action before long. 

In the 12 days since he put the euro firmly on the ECB’s agenda, the currency has actually weakened a little and certainly shied away from the $1.40 mark which many in the market see as a first red line for the euro zone’s central bank. That is probably because investors expect action from the ECB  soon and if so, there are good reasons to think they may be wide of the mark.