MacroScope

Will the guns fall silent?

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.

What’s it all about, Mario?

RTR3OB5X.jpg

It’s ECB day and after Mario Draghi’s recent dramatic utterances, expectation for fresh action has grown, expectations which are likely largely to be dashed.

Draghi told the world’s central banking elite in Jackson Hole last month that market inflation expectations were falling markedly and the European Central Bank would use everything in its power to stabilize them in order to avoid a deflationary spiral. He also ripped up central banking orthodoxy by calling for more fiscal spending by governments at the same time as redoubling economic reform efforts. How to read that?

Two possibilities spring to mind. Either Draghi (who has talked with a number of EU leaders recently) thinks he can secure fresh a  commitment on structural reform and can use that to go back to his ECB colleagues to argue they should cross the ultimate Rubicon and start printing money in return.

Over to Obama

U.S. President Barack Obama walks towards Air Force One before departing for Estonia while at Andrews Air Force Base outside Washington

Barack Obama is in Estonia before the NATO summit in Wales intending to pressure Vladimir Putin to back off in Ukraine. The rhetoric will be strong – not least about protecting the Baltics under NATO’s umbrella.

But with zero chance of western military action in Ukraine the hope is that economic pain via sanctions will bring Moscow to heel. Existing sanctions are clearly hurting the economy – the rouble has plumbed record lows as capital flees or shuns the country – but that hasn’t stopped Putin so far.

He seems intent not on taking Ukraine over but keeping the rebels sufficiently well armed and supported to keep Kiev off balance and unstable. If that is the intention it has certainly succeeded.

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.

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.

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”.