MacroScope

Q3 rebound but at cost of price cutting?

A woman walks past a shop in Madrid

Manufacturing PMI surveys across the euro zone and for Britain are due. The emerging pattern is of an improving third quarter after a generally poor second three months of the year.

The UK economy continues to romp ahead – growing by 0.8 percent in the second quarter – but on the continent there are signs of a new slowdown. The Bundesbank now forecasts no Q2 growth at all in Germany and though the euro zone flash PMI, released a week ago, showed the currency area rebounding in July, that largely came at the cost of companies cutting prices further, thereby pushing inflation lower still.

France continues to languish but Spain is one brightening spot, posting 0.6 percent quarterly growth in Q2, not stellar but healthy and adding to 0.4 percent growth in Q1.

Geece is also showing glimmers of life, albeit from a very low base. The country’s leading economic think tank predicts the economy should grow 0.7 percent this year, pulling clear of a six-year recession, but its soaring unemployment rate is likely to drop less than hoped. Moody’s may upgrade Greece’s sovereign rating which currently stands at Caa3, or at least raise the outlook, when it delivers a rating review later.

China’s factories posted their strongest growth in at least 1-1/2 years in July as new orders surged to multi-month highs, two PMI surveys showed, adding to evidence that the economy is gaining momentum after a spate of state stimulus measures.

EU cuts off Russian banks, puts ball in Moscow’s court

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

True to its word, the EU agreed sweeping sanctions on Russia yesterday, targeting trade in equipment for the defence and oil sectors and, most crucially, barring Russia’s state-run banks from accessing European capital markets. The measures will be imposed this week and will last for a year initially with three monthly reviews allowing them to be toughened if necessary.

There was no rowing back from the blueprint produced last week – having already agreed to exempt the gas sector – and the United States quickly followed suit, targeting Russian banks VTB, Bank of Moscow, and Russian Agriculture Bank, as well as United Shipbuilding Corp.

That is important. Both sides are striving to shut down alternative sources of capital for Russia’s financial sector although there has already been some reaching out to Asia. Gazprombank held a two-day roadshow with fixed-income investors in Seoul last week.

Moment of truth for EU sanctions

The logo of Russia's top crude producer Rosneft is seen in Moscow

President Barack Obama and the leaders of Germany, Britain, France and Italy agreed on a conference call last night to impose wider sanctions on Russia’s financial, defence and energy sectors.

EU ambassadors are meeting today and are expected to target state-owned Russian banks and their ability to finance Moscow’s faltering economy.

European Council President Herman Van Rompuy has written to EU leaders asking them to authorise their envoys to complete an agreement by the end of today. That would avoid the need for leaders to hold a special summit to approve the sanctions.

The long and winding road to sanctions

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

If it’s true to its word, the European Union will impose sweeping new sanctions on Russia this week, targeting state-owned Russian banks and their ability to finance Moscow’s faltering economy.

EU ambassadors will continue discussions on the detail of new measures, most significant of which would be banning European investors from buying new debt or shares of banks owned 50 percent or more by the state.

An embargo on arms sales to Moscow and restrictions on the supply of energy and dual-use technologies is also on the table but it looks like restrictions to supplying technology to Russia will include oil but exclude the gas sector.

EU slowly tightens screw

A coffin of one of the victims of Malaysia Airlines MH17 downed over rebel-held territory in eastern Ukraine, is carried from an aircraft during a national reception ceremony at Eindhoven airport

The EU is slowly tightening the screw on Russia, with senior officials proposing yesterday to target state-owned Russian banks in its most serious sanctions so far. Ambassadorial talks on how precisely that is to be done continue today and the measures are likely to be enacted next week.

One key proposal is that European investors would be banned from buying new debt or shares of banks owned 50 percent or more by the state. These banks raised almost half of their 15.8 billion euro capital needs in EU markets last year. That is a big deal and there are increasing signs of investors turning their back on Russia lock, stock and barrel. However, with its giant FX reserves, the central bank can provide dollars to fund external debt for a considerable period of time.

The ambassadors did agree to add more people and entities to the EU’s asset freeze list, using expanded criteria including Russian companies that help to undermine Ukraine’s sovereignty. The 15 individuals and 18 entities, half of which are companies, will be named today. Russian shares are down about 1 percent in early trade.

A dissenting voice

A train carrying the remains of the victims of Malaysia Airlines MH17 arrives in Kharkiv

Interesting intervention from former Russian finance minister Alexei Kudrin late yesterday who warned that Russia risked isolation and having its efforts to modernize derailed.

That sort of internal criticism is rare but Kudrin has done so before without censure which suggests Vladimir Putin is – or has been – willing to hear it. Kudrin added that Moscow should not intervene militarily in eastern Ukraine.

EU foreign ministers came up with more promises of tougher action against Russia without quite showing the colour of their money. Meeting in Brussels they discussed restricting Russian access to European capital markets, defence and energy technology, asking the executive European Commission to draft proposals this week.

EU on Russia sanctions: slowly, slowly

Ukraine's President Poroshenko and Dutch ambassador to Ukraine Klompenhouwer commemorate victims of Malaysia Airlines Flight MH17 outside the Dutch embassy in Kiev

EU foreign ministers meet to decide how precisely to deploy sanctions agreed 10 days ago to hit Russian companies that help destabilise Ukraine and to block new loans to Russia through two multilateral lenders.

The EU foreign ministers are tasked with preparing a first list of people and entities from Russia that would be targeted. The number of individuals and companies to be penalized is up for grabs so there is scope to adopt a tougher posture.

The public statements of EU leaders have made it sound like a more dramatic move is possible. Could that be the “sectoral” sanctions that Washington has pushed for which could deliver a really serious blow to the already flatlining Russian economy? Well no, not yet. That would require another summit of leaders. The next one is set for the end of August although an emergency meeting is not out of the question and today’s meeting could give a nod in that direction.

Acid test of EU’s resolve over Russia

Emergencies Ministry member walks at the site of a Malaysia Airlines Boeing 777 plane crash near the settlement of Grabovo in the Donetsk region

EU leaders said over the weekend they would be prepared to impose tougher sanctions on Russia, giving Vladimir Putin one more chance to douse the violence in eastern Ukraine and help investigators do their work at the site of the crashed Malaysian airliner or face the consequences.

A statement from the British government said Germany’s Angela Merkel, Britain’s David Cameron and France’s Francois Hollande agreed on a telephone call that their ministers should be ready to announce a fresh round of sanctions at a meeting of the European Union’s Foreign Affairs Council on Tuesday.

There is already scope to toughen measures announced last week to hit Russian companies that help destabilise Ukraine and to block new loans to Russia through two multilateral lenders. The EU foreign ministers are tasked with preparing a first list of people and entities from Russia that would be targeted. The number of individuals and companies to be penalized is up for grabs.

Sanctions tighten

Britain's PM Cameron, Portugal's PM Passos Coelho, Germany's Chancellor Merkel and Finland's PM Stubb attend an EU leaders summit in Brussels

EU leaders failed to get anywhere on sharing out the top jobs in Brussels last night but did manage another round of sanctions against Russia.

This time they will target Russian companies that help destabilize Ukraine and will ask the EU’s bank, the European Investment Bank, to suspend new lending for Russia and seek a halt to new lending to Russia by the European Bank for Reconstruction and Development.

That represents a significant stiffening of its measures though still some way short of the United States which yesterday imposed its most wide-ranging sanctions yet on Russia’s economy, including Gazprombank and Rosneft as well as other major banks and energy and defence companies.

EU carve-up

Elected president of the European Commission Juncker is congratulated by European Parliament President Schulz after his election in Strasbourg

EU leaders meet for a summit at which they were supposed to decide who gets which European Commissioner posts – one for each member state – in what will be a huge carve-up, so huge in fact that it may well be that only a very few jobs are decided tonight.

Current best guesses – though they are just guesses – are that despite a willingness among some to play nice with the Brits, Prime Minister David Cameron may lose out again having voted against Juncker at a June summit. He is seeking one of the big economic portfolios; internal market, trade or competition but putting forward a low-profile politician as his point person in Brussels has not that made that any more likely.

Because Juncker, the former Luxembourg premier, is from the centre-right and western Europe, the leaders may look for socialists or women from northern, eastern or southern Europeans for the other two key posts of European Council President and foreign policy chief. Denmark’s Helle Thorning-Schmidt keeps getting mentioned in dispatches for the former though her country is not in the euro zone, while the foreign minister of Italy is the frontrunner for the latter.