MacroScope

Nearer the brink

A man walks past cutting boards, that have been painted with images of Russia's President Vladimir Putin, at a street store in the center of St. Petersburg

Ukraine is nearer the brink with Russian forces now pretty clearly operating over the border. The past week has seen Ukrainian forces flee in the path of a new rebel advance which Kiev and its western allies says has been directly aided by Moscow’s forces.

Russian President Vladimir Putin called on Sunday for immediate talks on “statehood” for southern and eastern Ukraine, though his spokesman tried to temper those remarks, that following an aggressive public showing in which Putin compared the Kiev government to Nazis and warned the West not to “mess with us”.

The deputy leader of the breakaway east Ukrainian region said he would take part in talks with representatives of Moscow and Kiev in Minsk today but did not expect a breakthrough. Russian foreign minister Lavrov is out saying the Minsk talks will aim for an immediate ceasefire without conditions although he also said Ukrainian troops must vacate positions from which they can hit civilian targets. Meanwhile, eight Ukrainian seamen have been rescued, two are still missing, after a patrol boat was sunk by artillery.

Despite some vacillation at an EU summit on Saturday, there seems no way that Europe and the United States can avoid tougher sanctions to halt what they say is direct Russian military involvement in Ukraine.

One of the great imponderables of this crisis has been whether economic pain could bring Putin to heel or whether he felt free to act given the zero chance of any military intervention by the West, notwithstanding the call by U.S. lawmakers on both sides of the political divide on Sunday to send arms to Kiev.

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.

The catch: instead of no strings attached, as its policy was in the past for allowing banks access to cheap money, these long-term refinancing operations (LTROs) will require banks to set aside some money to lend to the private sector. So these ones are targeted, hence why the ECB calls them TLTROs.

Fed’s embrace of labor market is complete at Jackson Hole, 20 years later

Fischer, vice chairman of the Federal Reserve System, speaks with a demonstrator at the Jackson Hole Economic Policy Symposium in Jackson HoleBy Michael Flaherty, Howard Schneider and Jonathan Spicer in Jackson Hole, Wyo.

To dig deeper into the significance of Federal Reserve Chair Janet Yellen’s message at the annual central banking summit in Jackson Hole this past weekend, go back twenty years to the same event, when a top Fed official sparked a firestorm by showing support for the labor market. At the end of the 1994 symposium, the new Fed vice chairman at the time, Alan Blinder, gave a 14 page overview in which he stressed the point that central banks have a role in reducing unemployment.

The comments prompted speculation that he was opposing the views of his free-market boss, Alan Greenspan, and a media frenzy ensued — a frenzy that people present at the time say Blinder never recovered from. The contrast between what happened at Jackson Hole two decades ago, and what happened there last week shows how far the Fed has swung in its embrace of the labor markets, and how far it is ready to go.

For Yellen, the deeper aim may lie in research discussed over the weekend. Several papers dealt with the risk that short term cyclical problems in labor markets could become long term problems if people are left out of jobs, lose skills or young people fail to get a foothold.

UK rate consensus nearly rock-solid even as markets flip-flop over timing

BFor all of the flip-flopping in sterling markets in recent months over when the Bank of England will finally lift interest rates off their lowest floor in more than 300 years, the consensus view among forecasters has been remarkably stable.

Not only that, but surprise news that two of the nine members of the Monetary Policy Committee voted this month to hike Bank Rate by 25 basis points to 0.75 percent does not seem to have shaken the view that it will be early next year before rates go up.

The Reuters Poll consensus — which the BoE uses to brief the MPC on policy expectations and cites each month in the minutes — has concluded on each occasion since March that a UK rate hike is not going to happen until the first half of 2015. Before March, the view was that it was likely to take even longer.

from Global Investing:

Sanctions bite Russia but some investors are fishing

By Andrew Winterbottom

Russian stocks are up today, for the fifth day in a row and at the highest level in two weeks. What's going on? As we wrote  here earlier in the week, foreign investors have been fleeing this market.  However it could be that some of them are starting to put aside concerns about the potential for further sanctions on Moscow and are scouring Russia's stock markets for contrarian buying opportunities.

Russian stocks, chronically undervalued, are trading now at a discount of more than 60 percent to broader emerging markets, and to China which by all accounts is the standout beneficiary of the Russian woes. Just how cheap Russian shares are can be gauged from the fact they trade at a discount event to turbulent Pakistan. Here is a link that compares Russian equity valuations with other emerging and developed markets:  http://link.reuters.com/guv77v

While tensions between Russia and the West look to be only increasing, the risks of investing in Russia at present are obvious. But with greater risk comes greater potential reward, says Jonathan Bell, head of emerging market equities at Nomura Asset Management:

Euro zone recovery snuffed out

A BMW logo is seen the wheel of a car in Mexico City

A glut of euro zone GDP data is landing confirming a markedly poor second quarter for the currency area.

The mighty German economy has shrunk by 0.2 percent on the quarter, undercutting the Bundesbank’s forecast of stagnation. Foreign trade and investment were notable weak spots and the signs are they may not improve soon.

France has fared little better, flatlining again in the second quarter. That has forced the French government to confront reality, saying it would miss its deficit target again this year and cutting its 2014 forecast for 1 percent growth in half. There was no mention of the 2015 goal when France’s public deficit is due to come into line with the EU’s 3 percent of GDP cap, but Finance Minister Michel Sapin said Paris would cut its deficit “at an appropriate pace”.

All eyes on Putin

Russia's President Vladimir Putin talks to reporters during a meeting in Brasilia

Russian President Vladimir Putin will meet his top security officials prior to visiting annexed Crimea on Thursday with members of his government.

One way or another, with Ukrainian government forces encircling the main pro-Russian rebel stronghold of Donetsk, matters are coming to a head. Putin must decide whether to up his support for the separatists in east Ukraine or back off.

Tens of thousands of Russian troops remain camped near the Ukraine border and a Russian convoy of trucks carrying tonnes of humanitarian aid is heading for  eastern Ukraine. Kiev says it would not allow the vehicles to cross into its territory and it and Western governments warned Moscow against any attempt to turn the operation into a military intervention by stealth in a region facing a humanitarian crisis after four months of warfare.

Moment of truth in Ukraine

A Ukrainian serviceman guards a checkpoint near Donetsk

Financial markets perked up on Monday after Russia called off military exercises near the Ukraine border but was the confidence well founded?

NATO’s chief told Reuters there was a “high probability” Russia could launch an invasion of Ukraine where the government said it was in the “final stages” of recapturing Donetsk, the main city held by pro-Russian rebels, a battle that could be a decisive turning point in the biggest confrontation between Russia and the West since the Cold War.

Vladimir Putin must now decide whether to leave the rebels to their fate or step up his support. Thousands of Russian troops are still massed near the border and a Russian convoy of 280 trucks carrying humanitarian aid for Ukraine set off on Tuesday amid Western warnings against using help as a pretext for an invasion.

End game in east Ukraine?

A Ukrainian serviceman sits on a military armoured vehicle near Donetsk

Ukrainian government forces say they are preparing for the final stage of recapturing the city of Donetsk from pro-Russian separatist rebels after shelling its outskirts and making significant gains over the weekend.

The city faces increasing shortages of food, water and electricity. Vladimir Putin must now decide whether to leave the rebels to their fate or step up his support.  Kiev said on Saturday it had headed off an attempt by Russia to send troops into Ukraine under the guise of peacekeepers accompanying a humanitarian convoy sanctioned by the Red Cross. Moscow dismissed the allegation as a “fairy tale”.

On a weekend telephone call, U.S. President Barack Obama and German Chancellor Angela Merkel agreed that any Russian intervention in Ukraine, even under purported ‘humanitarian’ auspices, without the express authorization of Kiev was unacceptable and would provoke “additional consequences.”

When Mario met Jean-Claude

European Central Bank President Draghi and Eurogroup President -Juncker talk during a news conference in Nicosia, Cyprus

A day before the European Central Bank’s monthly policy meeting, ECB President Mario Draghi will travel to Luxembourg for talks with incoming European Commission president Jean-Claude Juncker. Oh to be a fly on the wall.

Some in the ECB are concerned that ultra-low sovereign borrowing costs and Draghi’s “whatever it takes” promise has relieved pressure on euro zone governments to carry on with structural economic reforms.
Juncker has signalled he is comfortable with a Franco-Italian drive to focus on growth and job creation rather than cutting debt.

ECB policymakers would probably be happy with that if it came in tandem with reforms to make euro zone economies more competitive. But it is worried about slippage.