|
 In a week heavy with diplomacy — U.S. President Barack Obama will
meet Chinese counterpart Xi Jinping on Monday in The Hague — markets
will seek clarity from the U.S. Federal Reserve on its monetary
policy and from Russia over its intentions in Ukraine.
While the U.S. data calendar is relatively light, Yellen has got
investors talking by suggesting interest rates could start rising
next spring, compared with most economists' expectations for the
second half of 2015.
The question is whether the host of Fed policymakers due to speak
this week, including the Fed's Chicago President Charles Evans, will
try to distance themselves from Yellen.
"We have to consider the possibility of the first rate hike coming
in April 2015," said James Knightley at ING in London. "Market
pricing is still favoring the third quarter of 2015, but a decent
rise in employment and business activity may see this change," he
said.
Last week the Fed, in its first policy-setting meeting under Yellen,
said it would factor in a wide range of economic measures as it
judged the correct timing for raising rates.
Investors are wondering how much of the slowdown in the U.S. economy
this winter was due to bad weather. Data this week may not clear up
that uncertainty because home sales, goods orders and consumption
data will be from February, rather than March.
Still, a Reuters survey of economists shows that Yellen's comments
have not altered their views. Ten dealers of 17 polled see rate
hikes in the second half of 2015, with another four saying increases
would not start until 2016.
That suggests a normalization of U.S. interest rate policy has yet
to be factored into the U.S. dollar exchange rates versus the yen
and the euro, economists say.
"We can only conclude that despite all the Fed's forward guidance
and efforts to improve its communication, the Fed's probable course
of action is not fully priced into dollar exchange rates," said
Ulrich Leuchtmann at Commerzbank.
"A phase of serious dollar strength will only set in later in the
year. But then it will do so with a vengeance," he said.
G7 MEETS TO DISCUSS RUSSIA
International diplomacy will be dominated by the response to
Russia's annexation of Crimea. Leaders of the world's leading
industrial democracies will hold a Group of Seven meeting without
Russia on the sidelines of a nuclear security summit in The Hague
this week to consider further responses to the crisis.
Russian markets ended last week by taking fright at a U.S. decision
to slap sanctions on Russian President Vladimir Putin's inner circle
of money men and security officials. Finance Minister Anton Siluanov
said Russia might cancel its foreign borrowing for 2014, though it
has enough foreign reserves and a low enough budget deficit to be
able to put off borrowing plans.
Russian stocks may be in for an easier ride if investors have a
sense that the stand-off with the West is not intensifying for now,
even though big risks remain.
[to top of second column] |
Given that U.S. sanctions targeting Russian elites were stronger
than anticipated and that EU leaders added more names to their list,
retaliation from Russia cannot be ruled out.
"While the situation remains tense, it likely remains stable in the
coming weeks," said Mujtaba Rahman, a political analyst at Eurasia
Group. "Wildcards include the possibility of a flare-up of Ukrainian
versus Russian violence in eastern Ukraine, which would heighten the
possibility of Russian invasion."
Difficult as it may be to look beyond Russia, China's release on
Monday of the HSBC flash manufacturing purchasing managers index
(PMI) will be arguably the most watched release in Asia, as
investors question how the Chinese economy has fared in the first
quarter.
"The February round of data pointed to the weakest growth momentum
since the global financial crisis," said Mole Hau at BNP Paribas,
referring to the recent slump in investment, retail sales and
factory output.
Chinese Premier Li Keqiang has said the economy faced "severe
challenges" in 2014. Bank of America Merrill Lynch has cut its
first-quarter growth forecast to 7.3 percent from 8.0.
THE PARIS SPEECH
A week before the European Central Bank's (ECB) monetary policy
meeting on April 3, President Mario Draghi has investors wondering
what it will take for him to counter the very low rate of inflation
in the euro zone.
Draghi will speak in Paris on Tuesday to try to drive the message
home that the ECB will stick to its very accommodative policy stance
for a long time, not raising rates even if inflation picks up.
Draghi has said the ECB would keep a close eye on the euro exchange
rate, one of the key parameters affecting inflation that is at a
four-year low. The Fed's rate hike talk has taken some steam out of
the euro's rise, though that might not last.
A string of euro zone PMIs will also give a sense of the bloc's
recovery, with many economists expecting a slight increase in the
euro area composite PMI, driven by a modest rebound in the
manufacturing sector.
Economists expect French PMIs to improve, while in Germany better
manufacturing surveys could compensate for last month's weakness.
"The gradual recovery continues," Citi economists said in a note to
clients. "We still expect the ECB to cut rates in June but the
window seems to be narrowing gradually."
(Editing by Mark Potter)
[© 2014 Thomson Reuters. All rights
reserved.] Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
