MacroScope

Draghi vs Weidmann

By Mike Peacock
July 14, 2014

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European Central Bank President Mario Draghi makes a lengthy appearance in the European Parliament in Strasbourg. He will doubtless reassert that the ECB would start printing money if necessary but, as we reported last week, policymakers are fervently hoping they won’t have to and that a raft of measures announced in June will do enough to lift the economy and inflation.

Bundesbank chief Jens Weidmann fired another broadside over the weekend, saying rates were too low for Germany and policy should remain expansive for no longer than absolutely necessary.

With less than a week to run to the July 20 deadline for a deal, Iran and the six world powers are miles apart on Tehran’s nuclear programme. U.S. Secretary of State John Kerry said on Sunday major differences persist – largely over uranium enrichment —  with Iran and Tehran did not demur.

The six want Iran to scale back its nuclear programme to deny it any capability to quickly produce atomic bombs. Iran says its activities are entirely peaceful and want crippling sanctions lifted as soon as possible. Kerry will meet his Iranian counterpart Javad Zarif for a second day in a row on Monday to see if progress can be made.

Centre-left political novice Miro Cerar won an election in Slovenia on Sunday. Cerar supports liberalising the economy and labour market rules and selling off smaller state firms. But he has come out against the major slated sales of Slovenia’s telecoms operator and international airport and pledged on Sunday to rewrite a reform package agreed with euro zone ministers. That has investors wondering  how public debt will be reined in.

After the first meaningful bout of market contagion in Europe this year and probably some way further back than that, the question is whether it will spiral or fizzle out. There are good reasons to expect the latter – after a Thursday sell-off markets settled on Friday and while Portugal’s largest listed bank, Banco Espirito Santo is in trouble it looks like contained trouble. Portugal’s government and central bank assured investors that the country’s financial system was sound.

Asian shares have risen and Europe is expected to follow suit, albeit modestly. However, the warning from the Bank for International Settlements – the central bankers’ club – two weeks ago that “euphoric” markets had got dangerously ahead of the economies that underpin them continues to resonate. The Federal Reserve made similar noises in the minutes of its last meeting, though it seemed to concluded there wasn’t much it could do. And there are certainly signs that the euro zone recovery is gaining  no momentum.

Otherwise, it was a weekend of violence.

A U.N. Security Council call for a ceasefire went predictably unheeded as Israeli naval commandos clashed with Hamas militants in a raid on the coast of the Gaza Strip on Sunday, the first ground assault of a six-day Israeli offensive aimed at stopping Palestinian rocket fire.

Israeli military said it was a raid which had achieved its mission not a longer incursion. Thousands fled their homes in a Gaza town after Israel warned them to leave ahead of threatened attacks on rocket-launching sites. Early today, rockets were fired at Israel from Lebanon.

No major offensive in Donetsk, the east Ukraine city of a million people where pro-Russian separatists have dug in, but Ukrainian war planes bombarded separatists along a broad front after President Petro Poroshenko said “scores and hundreds” would be made to pay for a deadly missile attack on Ukrainian forces.

The planes targeted positions from where separatists, using high-powered Grad missiles, bombarded an army brigade on Friday, killing 23 servicemen. The question remains how to try and retake Donetsk without colossal loss of life.

Moscow threatened Kiev with “irreversible consequences” after a man was killed by a shell fired across the border from Ukraine. Angela Merkel and  Vladimir Putin met briefly before the World Cup soccer final in Rio and called for a stepping-up of peace efforts.

Iraqi soldiers backed by Shi’ite militias fought Sunni rebels for control of a military base 80 km northeast of Baghdad on Saturday. On Sunday,  Islamist insurgents attacked a town about 70 km north of Baghdad, seizing local government buildings. It’s all rather close to the capital.

After a U.N. envoy warned of chaos if divided lawmakers did not make progress towards naming a government, Iraq’s parliament failed on Sunday to break a deadlock which is holding up the formation of new government.

After a brief session, parliamentary officials delayed until Tuesday efforts to reach agreement between Shi’ite, Sunni and Kurdish politicians on the posts of prime minister, president and parliamentary speaker. Heavy fighting broke out between rival militias vying for control of Libya’s main airport on Sunday, killing at least seven people and forcing a halt of all flights in the worst fighting in the capital for six months.

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