MacroScope

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.”

With Russia retaliating against western sanctions, Iraq teetering on the edge and Gaza and Libya little better, could this be the point at which all these world crises start to derail economic recovery?

The European Central Bank has clearly flagged that concern, saying the Ukraine crisis and tit-for-tat sanctions could pose a serious risk to the euro zone economy. The survey evidence is already showing a loss of confidence among business and investors which could lead to a new curb on investment.

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.

The Scottish question

First Minister of Scotland Alex Salmond smiles as he watches a diving event at the 2014 Commonwealth Games in Edinburgh

Scottish nationalist leader Alex Salmond and former British finance minister Alistair Darling, who is fronting the campaign to remain part of the United Kingdom, go head-to-head in the first and possibly only live television debate of the campaign. It is a bigger moment for Salmond, Scotland’s First Minister, who must garner a shift in the polls which consistently put his “Yes” campaign significantly behind with the referendum only six weeks away.

At the last British general election, Liberal Democrat leader Nick Clegg was widely perceived to have won the leaders’ debates yet it didn’t translate into votes. There are, however, a large number of “don’t knows” to play for in Scotland and Salmond is by common consent the more charismatic figure and slick orator.
During the two-hour debate, Darling is likely to highlight the uncertainty over whether an independent Scotland could retain the pound and automatically be part of the EU and how the nationalists would fund their public spending pledges.

The “No” campaign can also point to the greater devolved powers all the major parties are promising Edinburgh should the Scots vote no. Overnight, Britain’s three main national political parties all said they would seek further powers for Scotland in the event of a “No” vote, in the areas of fiscal responsibility and social security.

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.

Another month, another downside surprise on euro zone inflation

sale signsNobody except a born pessimist ever expects a bad situation to get incrementally worse.

But the relentless downward trajectory of inflation in the euro zone has got plenty of economists sounding unconvinced that the situation will turn around any time soon.

A surprise plunge in Spanish inflation to -0.3 percent in July and a lack of any additional inflation pressure from Germany, the euro zone’s largest economy, dashed hopes that euro zone inflation would rise from 0.5 percent back toward the European Central Bank’s 2.0 percent target.

Euro zone inflation to fall further?

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Euro zone inflation is the big figure of the day. The consensus forecast is it for hold at a paltry 0.5 percent. Germany’s rate came in as predicted at 0.8 percent on Wednesday but Spain’s was well short at -0.3 percent. So there is clearly a risk that inflation for the currency bloc as a whole falls even further.

The Bundesbank has taken the unusual step of saying wage deals in Germany are too low and more hefty rises should be forthcoming, a sign of its concern about deflation. But the bar to printing money remains high and the European Central Bank certainly won’t act when it meets next week. It is still waiting to see what impact its June interest rate cuts and offer of more long-term cheap money to banks might have.

German retail sales, just out, have risen 1.3 percent on the month in June after a fall in May.

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.

Draghi vs Weidmann

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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.

Juncker begins to fill in the gaps

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European Commission president-elect Jean-Claude Juncker will hold talks with the various political groupings in the European Parliament as he seeks to develop policy positions. Most interesting would be indications about which way he is bending in the growth versus austerity debate.

Italy’s Matteo Renzi, resurgent after a strong performance in May’s EU elections, is pressing for a focus on measures to get the euro zone economy firing and has even managed to get Germany to talk the talk. But any leeway will be within the existing debt rules, not by writing new ones.

We know from the history of the euro debt crisis that Berlin can only move so far, so fast and only last week it proudly proclaimed it would not be a net borrower of zero next year, for the first time in over 45 years. Having said that it has just passed into law a generous national minimum wage and its labour costs are rising, so there is some rebalancing going on.

Balance tilted in Ukraine?

slaviansk.jpgUkrainian forces pushed pro-Russian rebels out of their stronghold of Slaviansk on Saturday. Its re-capture represents Kiev’s most notable military victory in three months of fighting in which more than 200 Ukrainian troops have been killed as well as hundreds of civilians and rebels.

The regions of Donetsk and Luhansk are likely to be next in the government forces’ crosshairs.

Talks between Iran and the six world powers –  the United States, Britain, France, Germany, Russia and China – over its disputed nuclear programme stretch through the week, leading up to a July 20 deadline which has been set for a definitive deal.
Most diplomats involved in the talks expect that date to lapse though we reported exclusively that Iran has reduced demands for the size of its future nuclear enrichment programme.