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US-Russia Row Over Diplomats Could Escalate to Economic Damage

US-Russia Row Over Diplomats Could Escalate to Economic Damage
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Tuesday, 27 March 2018 08:02 AM Current | Bio | Archive

More than 20 western allies that include the U.S. have ordered the expulsion of over 100 Russian diplomats in response to the nerve agent attack in the UK on March 4.

This represents the biggest concerted blow to Russian intelligence networks in the west since the cold war.

Notwithstanding that, the whole event is something that, at least for now, is of mild interest to international financial markets.

One should also not overlook the fact that the response is clearly diplomatic, not economic.

If investors think this is going to stay in the world of diplomacy, then the market consequences of this are limited even if there is a further escalation.

However, if markets start to believe that any further escalation will include new economic measures, then the severity of this could be quite aggressive in the future.

That is something that could have selective consequences in financial markets.

In the meantime, over in Vienna, Austria, German Bundesbank President and member of the European Central Bank’s Governing Council Jens Weidmann gave yesterday a prepared speech with some interesting remarks that could be of interest for all investors.

While Mr. Weidmann welcomed the tariffs agreement that will exclude the European Union’s (EU) 27 members from punitive aluminum and steel U.S. duties he warned that the EU’s respite was only temporary while also saying: “It’s not a victory for free global trade because punitive tariffs remain in place for other countries that could not secure preferential treatment. Therefore, the goal must be not only to prevent new barriers to trade or keep them as low as possible, but to reduce existing ones. I very much hope that recent signals from the U.S. to talk about such a reduction will not fizzle out but trigger a change of perspective.”

Perhaps it could be helpful to recall that at last week’s G-20 meeting in Buenos Aires, Argentina, when the participants to the summit failed to convince Treasury Secretary Steven Mnuchin to pare back protectionist steps, Mr. Mnuchin’s response was: “We are not afraid” of a trade war.

In his speech, Mr. Weidman said everyone stands to lose in such a conflict.

Besides all that, Mr. Weidman also said that ECB monetary policy tightening could start sooner rather than later. For euro and Euro area investors this is perhaps not a complete surprise as market expectations are already that the ECB could raise interest rates somewhere in Q2 of next year (2019) and end its bond buying program before the end of this year.

Maybe it’s good to remind that validating market expectations is not of course something that is likely to lead to market moves.

What was also interesting was the fact that Weidmann was also critical on cryptocurrencies in a rather dismissive sort of a way. There is no need to take these things as seriously as currencies, because they are not currencies and, at least in the legitimate world, they will never be currencies.

However, as the cryptocurrency bubble continues to deflate, there are potential economic consequences monetary policy makers need to be aware of.

A complete deflation of the bubble could lower energy prices a bit, as electricity supply would suddenly become available for economically productive occupations.

More immediately, deflating the bubble will have consequences for those who bet their money in the bubble. This may not be especially relevant for Germany, a country whose population knows a thing or two about valueless currencies, but it is relevant for some other economies where participation in the cryptocurrency bubble has been a bit more widespread.

The day ahead is relatively quiet in terms of economics.

Atlanta Fed’s President Raphael Bostic is scheduled to speak today, which may be worth listening to.

Today, we also have the Conference Board’s Consumer Confidence Index, which is a leading indicator, which stood in February at its highest level since November 2000.

The index compiles a survey of consumer attitudes on the economy. The headline is based on consumers' perceptions of current business and employment conditions, as well as their expectations for 6 months hence regarding business conditions, employment, and income.

So far, this year's tax cut has far offset any concerns over stock market volatility while income expectations have been solid, and the assessment of the labor market has been strong. March is expected to be another month of exceptional strength.

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More than 20 western allies that include the U.S. have ordered the expulsion of over 100 Russian diplomats in response to the nerve agent attack in the UK on March 4.This represents the biggest concerted blow to Russian intelligence networks in the west since the cold...
russia, economy, trade, markets
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2018-02-27
Tuesday, 27 March 2018 08:02 AM
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