Sanctions against Russia continue to be in focus ahead of FOMC tomorrow

• Sanctions and their effects jawboned by both sides

• IMF estimates that GBP is 5-10% overvalued

• Light data flows leads a quiet start ahead of FOMC

• Japan less confident on outlook

Yesterday was a subdued day with a lacklustre start to the week, but sanctions against Russia seem to be the key market concern. Russia’s foreign minister Lavrov has stated that Russia will not impose tit for tat sanctions, and also commented that the US and EU sanctions will not achieve their goal and are more likely to make Russia more economically independent. An article in Der Spiegel, however, cites German intelligence showing that sanctions are starting to put pressure on the oligarchs and weakening relations with Putin. Further sanctions were announced by Japan, while a US White House advisor said the US would introduce further sanctions this week.

The elephant in the room was mentioned by the German CDU deputy chairman Michael Fuchs, that being the inclusion of sanctions on natural gas purchases from Russia. He commented that this would be the strongest possible sanction that would hit Russia, while Germany would have other options for its natural gas purchases. The main issue is that this would push up gas prices across Europe causing an increase in inflation and a drag on an already struggling economy, while there would also be the question of whether Russia would put prices up down the line in retaliation or to compensate for the loss.

In further news likely to raise tensions, the Hague’s arbitration court ruled against Russia and in favour of a group of shareholders in defunct oil giant Yukos, awarding compensation of around USD50 billion. It is expected to announce on Thursday that Russia must pay the compensation, though Russia’s foreign minister has not ruled out an appeal.

Sterling - along with most currencies - traded in a fairly tight range yesterday, trying to bounce back through 1.70 against USD which it managed by a pip before dropping back. Importantly however, sterling managed to break the 8 session losing streak. There was little datawise to affect the pound and the same applies today with mortgage lending and consumer credit out this morning, expected to show a reduction in mortgage approvals to 61,700.

The more interesting commentary came from the IMF which commented on the UK housing market risks which the Bank of England may need to curb via interest rate rises if the macroprudential measures attempted so far don’t work. The IMF also suggested that sterling is overvalued by around 5-10% which fits with many bank economists’ thinking, but could hamper rebalancing - although they said the recovery is currently becoming more balanced. In less good news for the UK, Lloyds Bank was handed fines by the UK Financial Conduct Authority and the US authorities, totalling around £220m, for its part in the Libor rigging scandal.

From the US there was limited data with US June pending home sales coming out worse than expected at -1.1% month on month and continuing to paint a fairly poor picture of housing market health. The retail trade data for June also came in weaker than expected at -0.6% year-on-year, slightly worse that the forecasted -0.5%. The focus remains on tomorrow’s FOMC decision with only Case Shiller home prices and Consumer confidence - expected this afternoon – to show minimal improvements.

Bank of Japan officials are becoming less confident in their outlook on exports as they fell for a second straight quarter in the three months up to June. If exports stay listless or deteriorate further, it could force the central bank to rethink its outlook on growth and prices and ultimately could put the BOJ under renewed pressure to add to its already massive stimulus measures. The next policy meeting is August 7th and 8th where the potential for an export recovery will be in focus.

Have a great day.