First, on the geopolitical front the enforcement of sanctions on Russia is being met with disdain by some large European corporations. French energy giant Total is in talks with the largest privately held Russian energy company Lukoil to develop gas and oil fields using the latest drilling techniques. On Wednesday, Siemens CEO Joe Kaeser met directly with Russian President Putin and assured him that Siemens will not let temporal political problems upset the solid business relationship that the German conglomerate has developed with Russian technology and medical groups. The use of sanctions is problematic in a world defined by business interests. The German small and medium enterprises have vast business relations with Russia and it is estimated that 500,000 jobs are related to the export side of the equation. Russia sends energy and Germany responds with advanced, highly engineered products.
If Henry Kissinger is correct and “America has no permanent friends or enemies, only interests,” then the Europeans cannot be held to some higher standard of conduct. I’ve never been a fan of Henry K. but this view makes the idea of international law very suspect. A great deal of foreign policy is set on the RATIONAL ACTOR MODEL in which nation-states will act rationally and thus respond in a very thoughtful, measured way, which is why it is presumed that sanctions will affect Russian behavior. Let’s hope that the rational actor model is a better predictor than the efficient market hypothesis.
***The first quarter is drawing to a close and it is time to put perspective to the first three months of 2014. The U.S. SPOOS are virtually unchanged and the NASDAQ has fallen more than 1 percent. The German DAX is lower by 1.5 percent, the U.K. Footise is down 3 percent and the biggest loser has been the Nikkei, dropping 12 percent. The weakness in the Japanese market has been an enigma because of the continued aggressiveness of the Bank of Japan in adding liquidity to the system through JGB purchases. The Japanese economy and financial markets are going to undergo a stress test come April 1 as the planned 3 percent rise in the sales tax begins. The last time the Japanese policy makers undertook a program of raising VAT taxes was 1997 and it failed in its goal to stem the budget deficit and resulted in a renewed deflationary cycle. This time the BOJ seems like a better patron of this policy and looks ready to curb any negative result with increased quantitative easing through large-scale asset purchases.
A good barometer for the success of ABE‘s new initiative will have to be the NIKKEI, especially the Japanese financial stocks. Many analysts believe the Abe Government will succeed because the new fiscal year will bring spending plans forward to insure against a drag from decreased consumer demand. In 1997 the Japanese government was slashing government spending while the BOJ was not an active participant through any type of liquidity provisions. Will it be different this time? Again, watch the Japanese bank stocks as a barometer for the success of Abenomics. The NIKKEI is sitting on the 200-day moving average. It’s very convenient for those looking for a way to measure risk levels, either being long or short.
***There was a story that quoted Bundesbank President Jens Weidmann saying a QE program by the European Central Bank is “… not out of the question.” This is a major shift from the man who has repeatedly said no to more aggressive action by the ECB.T he Weidmann shift comes a week before the next ECB meeting and should provide Mario Draghi with the latitude to push for some new liquidity program for the European financial system. The EURO currency has sold off in response to the supposed new laxity of the German central bankers. The EURO is now unchanged on the year but if President Draghi disappoints the markets next week by no action, the EURO will rally.
Some analysts are predicting that the ECB will go to a NEGATIVE RATE on DEPOSITS AT THE ECB. This has not been tried by a major central bank with a reserve currency. If reserve rates go negative the ECB will hope that banks will be forced to unleash excess reserves into the domestic economies. If the ECB goes negative on rates it may force the BOJ to become even more aggressive. The FED is tapering but it seems that the world’s other large central banks are preparing to increase liquidity. Only nine months left on the calendar…