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from MacroScope:

Jaw jaw and war war

An Ukrainian serviceman is seen next to a sight for a gun near the eastern Ukrainian town of Luhansk

Pro-Russia separatists at talks with representatives from Moscow and the OSCE in Minsk said they would be prepared to stay part of Ukraine if they were granted "special status", which is unlikely to be acceptable to Kiev.

The talks will continue later in the week and come as the Ukrainian military faced a run of reverses on the battlefield which Kiev says have been engineered by the intervention of at least 1,600 Russian combat troops.

In the latest in a string of setbacks, Ukraine's military said it had pulled back from defending a vital airport near the city of Luhansk, where troops had been battling a Russian tank battalion. Ukrainian President Petro Poroshenko accused Russia of "direct and undisguised aggression" which he said had radically changed the battlefield balance. Moscow denies it is involved.

All that means the United States and EU must surely toughen their sanctions on Russia although several EU countries heavily dependent on Russian gas, including the Czech Republic, Slovakia and Austria, are opposed to new measures, which require unanimous agreement.

from MacroScope:

The ECB keeps putting up the cash, but where’s the lending?

Draghi and TrichetFor the European Central Bank, a lot is riding on euro zone banks ramping up lending to the private sector. Unfortunately, after a very long time, lending still is not growing. It fell 1.6 percent on a year ago in July.

Struggling with a dangerously low inflation rate that is expected to dip even further to 0.3 percent in August, the ECB placed a big bet back in June that hundreds of billions of euros more in cash for banks in further liquidity auctions in October and December this year would help turn the situation around.

from Breakingviews:

UK election clouds have gilt-edged lining

By Swaha Pattanaik

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

British politicians are drawing up battle lines more than a year before general elections. On current form, the left-leaning opposition could oust the governing coalition. However, any knee-jerk investor dismay may be tempered given the Labour Party is more likely to cement the UK’s place in the European Union than the ruling Conservatives.

from MacroScope:

Rates sweetener makes Fed tapering pill easier to swallow

 U.S. and German government bonds came under selling pressure on Thursday, one day after the Federal Reserve announced it will start trimming its monthly asset purchases by $10 billion to $75 billion. The move was much anticipated but was also historically significant – it is the first step towards unwinding the abundant monetary stimulus that helped keep the financial system afloat during years of crises.  

But the bond sell-off was limited, only taking yields to the top-end of ranges held in recent months.  On Friday, U.S. yields were mixed and German borrowing costs little changed.

from MacroScope:

In euro bond markets, world still upside down

Corporate bonds normally yield more than sovereign debt since companies are seen as more likely than states to go bust. But during the euro zone debt crisis, when various governments had to be bailed out, that relationship broke down in Spain and Italy.

Click here for graphic by Vincent Flasseur.

Madrid and Rome are paying more to borrow in the market than similarly-rated companies generally. Ten-year Spanish and Italian sovereign bonds offer a comfortable premium of more than 60 basis points over a basket of BBB-rated corporate debt, even though that gap has more than halved from this year’s highs.

from Global Investing:

Red year for emerging bonds

What a dire year for emerging debt. According to JPMorgan, which runs the most widely run emerging bond indices, 2013 is likely to be the first year since 2008 that all three main emerging bond benchmarks end the year in the red.

So far this year, the bank's EMBIG index of sovereign dollar bonds is down around 7 percent while local debt has fared even worse, with losses of around 8.5 percent, heading for only the third year of negative return since inception. JPMorgan's CEMBI index of emerging market corporate bonds is down 2 percent for the year.

from MacroScope:

Broken (record) jobless data: Euro zone unemployment stuck at all-time high

Surprise! Euro zone unemployment was stuck at record high of 12.2 percent in May, with the number of jobless quickly climbing towards 20 million. Still, as accustomed to grim job market headlines from Europe as the world has become, it is worth perusing through the Eurostat release for some of the nuances in the figures.

For one thing, as Matthew Phillips notes, Spain’s unemployment crisis is now officially more dire than Greece’s – and that’s saying something.

from MacroScope:

Forecasts for the euro zone depend more on head office location than analysis

Ask an economist a question about the euro zone, and the answer will as much depend on the location of their head office as any analysis of the data.

It's been noted before (herehere, and here), but economists and fund managers working for euro zone-based banks and research houses tend to be optimists about the euro zone. Everywhere else - including Britain, North America and the Nordics - they tend to be pessimists.

from Breakingviews:

Europe tries to skirt both chaos and complacency

By Neil Unmack and Olaf Storbeck

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

The two engines of the euro zone bond rally are sputtering. Rising yields on risk-free debt are hitting one, and the German constitutional court hearing has thrown a little sand in the other. But a tougher ride for peripheral debt is not necessarily all bad.

from MacroScope:

Why a German exit from the euro zone would be disastrous – even for Germany

Let’s face it: “Gerxit” doesn’t roll of the tongue nearly as smoothly as a “Grexit” did. While Europe continues to struggle economically, fears of a euro zone break-up have receded rapidly following bailouts of Greece and Cyprus linked to their troubled banking sectors.

Mounting anti-integration sentiment in some of region’s largest economies, raise concerns about whether the divisive monetary union will hold together in the long run. Indeed, the rise of an anti-Europe party in Germany begs the question of what would happen if one of the continent’s richer nations decided to abandon the 14-year old common currency. Never mind that, viewed broadly, the continent’s banking debacle has actual saved Germans money so far.

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