MacroScope

Will the guns fall silent?

By Mike Peacock
September 5, 2014

A Ukrainian serviceman smokes as he sits on an armoured vehicle near Kramatorsk

Ukrainian President Petro Poroshenko and the main pro-Russian rebel leader said they would both order ceasefires on Friday, provided that an agreement is signed on a new peace plan to end the five month war in Ukraine’s east.

Talks are due to resume in the Belarussian capital Minsk. On Wednesday, following a string of aggressive statements in previous days, Vladimir Putin put forward a seven-point peace plan, which would end the fighting in Ukraine’s east while leaving rebels in control of territory.

Poroshenko expressed “cautious optimism” about the Minsk talks but given the rebels have advanced rapidly across eastern Ukraine in the past week, backed by what Kiev and NATO say is the support of thousands of Russian troops with artillery and tanks, the balance of interests in calling hostilities off has shifted.

Regardless of any truce, the West is preparing more sanctions against Russia. Existing measures are already hurting its economy, with the rouble plumbing record lows, but that has not prompted Putin to back off.

Here too there are mixed messages. The White House said key NATO leaders had agreed at their summit in Wales that Russia should face further sanctions, without giving any details. French President Francois Hollande, who suspended delivery of a helicopter carrier to Russia earlier this week, said further sanctions depended on events in Ukraine in the coming hours.

EU ambassadors have been framing the bloc’s latest response during the course of this week and may come up with concrete proposals today which could be left hanging over Moscow.
Day two of the NATO summit will focus more on Iraq and how to combat Islamic State militants who have laid claim to much of the north of the country.

U.S. air strikes against the militants have significantly hampered the militants’ advance and Washington is looking for willing partners.
Britain and Australia are likely candidates. Germany has said it was in talks with the United States and others about possible military action against Islamic State but made clear it would not participate.

France, which was left on a limb when Barack Obama backed down from the threat of strikes on Syria following a major chemical attack a year ago, was thought to have been reluctant but statements from the Elysee suggest it may be amenable.

After a stunning 4.6 percent monthly rise in German industry orders yesterday, industry output figures for July have just posted a 1.9 percent increase, the biggest rise in more than two years.

There’s an interesting divergence developing here. The sentiment surveys suggest business confidence has fallen off a cliff because of the Ukraine crisis and investment will atrophy. But that really hasn’t shown up in the hard data for the third quarter, at least in Germany, so far. Something has to give.

The European Central Bank surprised on Thursday with an interest rate cut to augment the more anticipated launch of  a programme to buy securitized debt from banks in an attempt to inject more credit into the floundering euro zone economy.

In total, this new gambit plus the already-announced plan to give banks cheap four-year loans in the hope they will lend on to businesses and households could inject the thick end of a trillion euros into the euro zone economy in the next couple of years.

Markets have been fixated on whether Mario Draghi could persuade his colleagues to go for full-on QE or not but the package of measures he has got through will have much the same effect. A snap Reuters poll of economists last night (hats off for getting that out so fast) put the chances of a money printing programme now at just 40 percent.

The consensus was that the ECB would buy 400 billion euros of asset-backed securities and covered bonds over two years while banks will take up 275 billion euros of cheap loans which will be enough to drive up inflation and get growth going.

Cernobbio hosts Italy’s answer to Davos features government and business leaders over the next three days with luminaries including Italian Economy Minister Pier Carlo Padoan and Fiat CEO Serio Marchionne as well as various outgoing European Commissioners pondering the sickly state of the Italian and euro zone economies as Prime Minister Matteo Renzi’s government launches its latest drive to convince Europe that it is serious about reform. ECB executive board member Peter Praet, Spanish Economy Minister Luis de Guindos are among the other participants.

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