Ukraine Conflict Will Worsen, Then Improve: Woods

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March 17 (Bloomberg) –- Citi Investment Management Managing Directory, Head of Fixed Income John Woods discusses the conflict in Ukraine, Russia pulling $100B out of U.S. Treasuries and the Fed cutting its QE pace to $55B with John Dawson, David Ingles, Angie Lau and Rishaad Salamat on Bloomberg Television’s “Asia Edge.” (Source: Bloomberg)

Turning to our top story and our guest john woods from cii.

Let's start -- from citi.

Let's start out with crimea.

Where does this leave east-west relations?

I think the first takeaway is that it is unlikely to have an early resolution.

I think this thing has further to run.

Frankly, i think it is likely to escalate before it improves.

This afternoon or this evening in asia time to mow we have a meeting with eu officials tried to define what these sanctions are in response to this referendum.

I think that that will ratchet up the pressure.

All of this is coming amidst some concern in general over emerging markets and this sort of tension just adds to it.

This is a man, vladimir putin, who is really putting at risk the economic future of russia for a historical legacy.

Will it be worth the price?

I certainly think nationalism seems to be trumping economic reality.

Russia is expected to grow about 1% this year.

Any disruption to essentially oil and gas is likely to impact the economy quite seriously.

So there is a very dicey game that is being played here.

Frankly, if you were a stan, you would be worried about a similar sort of event playing out.

There are two reactions here.

One that there can be an overthrow of a government as ukraine has shown us.

But also the ramification of that, that there is a very strong crack down.

I think this is eventually likely to escalate more before it starts to improve.

When we talk about the tangible economic impact, i guess more than the impact on russians, we are looking at economic sanctions, but what are we looking at in the medium-term?

I we look at [indiscernible] what concerns me most is the potential contagion that could stem from rising risks of the urethane -- of the ukraine revolt.

I am certain it is a low risk or probability event at the moment.

But if we were to see russia demanding market prices for the gas currently -- they are subsidized currently by 33%, a third -- if russia were to demand the food cost for that, there would be a material impact on the fiscal revenue.

They should have done in november when it would hurt more than, really.

There were threats.

Ukraine is in a very fragile state at the moment.

Em in general is in a delicate state and this could potentially increase the level of tension.

What about jputin's -- what about putin's legacy?

The russians have pulled out of u.s. treasuries.

What is the objective that?

It seems to be a relatively small number.

There seems to be a certain amount of safe haven going on and protection of assets.

In terms of the broader legacy, it seems to me that the economy -- i look at this from an economic perspective -- it seems that russia does have a very narrow-based -- a very narrow base from its production side.

Any legacy increase that and improves the sustainable and great outlook.

Let's switch topics a little bit.

We have fo omc janet yellen i'm her one.

What will we be expecting?

I don't think we will be surprised if they continue as indicated.

But what are you listening for?

Whether or not the fomc will take into account some of these geopolitical ruptures that are impacting markets.

I don't think that is likely because they didn't last time.

I think most people are looking at the quality or the nature of bulleted it forward guidance -- of qualitative forward guidance.

Some people argue -- there is this sense that maybe that 6.5% will be hit sooner rather than later.

But they have made some hints, haven't they?

This is where the qualitative forward guidance comes in.

They might get rid of 6.5%. this is what the market is speculating.

I think conditions and statements from the committee about their forward guidance will lead markets.

He wants to stop.

How would you deal with that?

If you didn't get any more forward guidance?

That would bring us back to where we were a few years ago when we did not get forward guidance and there was a big guessing game ahead of a particular meeting and you are looking at the size of minutes, trying to guess what it meant.

I think forward guidance, any form of transparency gives the market some indication.

But part of the argument is that perhaps it would encourage you to take more risks because you feel that there is a lot of guidance going on, a lot of transparency.

So they will just tell us when they change their minds were changed traction a little bit.

Until then, perhaps the appetite to take more risk is going to be there.

In this environment, nobody wants to fight the central bank.

Don't fight the fed.

And the fed do have access to an awful lot of information that the market treats very seriously.

And to the extent that we are now looking in this forward guidance at the various indications of policy direction, i still think that it remains very credible.

It is a good point that you brought up.

They keep saying that we might -- inflation, do you give more weight to their guidance on inflation?

We seem to be approaching the end of plum and threshold but inflation seems to be a little bit sticky.

The expenditure metric that they use most commonly, frankly which is the most scary from a risk of deflation rather than inflation.

If you look at the market base series, you can see it has been trending down for a number of quarters.

On that basis alone, we shouldn't really expect to see any tightening of fed all a -- fed policy.

If you move away from these metrics, then unemployment is looking more healthy.

But you suddenly have these countervailing indicators which

This text has been automatically generated. It may not be 100% accurate.

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