MacroScope

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.

Western countries accuse Moscow of sending armoured columns of troops into Ukraine, where the momentum in a five-month war shifted last week in favour of pro-Russian rebels. They were virtually on their knees but are now resurgent and said last night they were on the point of retaking the strategically important Donetsk airport.

Putin’s spokesman has just said the Russian president has spoken to his Ukrainian counterpart Petro Poroshenko by telephone and the two leaders largely agreed on what needs to be done to resolve the crisis. No further details were forthcoming.

All eyes on Putin

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

Russian President Vladimir Putin will meet his top security officials prior to visiting annexed Crimea on Thursday with members of his government.

One way or another, with Ukrainian government forces encircling the main pro-Russian rebel stronghold of Donetsk, matters are coming to a head. Putin must decide whether to up his support for the separatists in east Ukraine or back off.

Tens of thousands of Russian troops remain camped near the Ukraine border and a Russian convoy of trucks carrying tonnes of humanitarian aid is heading for  eastern Ukraine. Kiev says it would not allow the vehicles to cross into its territory and it and Western governments warned Moscow against any attempt to turn the operation into a military intervention by stealth in a region facing a humanitarian crisis after four months of warfare.

A reminder that all is not well in the euro zone

Bank of Portugal Governor Costa arrives to read a statement in Lisbon

A reminder that while the euro zone crisis may be in abeyance, it still has the ability to bite.

Portugal will blow 4.4 billion euros of the 6.4 billion euros left from Lisbon’s recently exited international bailout programme shoring up troubled lender Banco Espirito Santo which will be split into “bad” and “good” banks. Junior bondholders and shareholders will be heavily hit.

BES’s tale of woe is so specific that there is no obvious reason to think it will be replicated. But it is a reminder that bank stress tests later this year could throw up other nasties and more immediately the saga leaves Lisbon short of rescue funds should anything else blow up. The bond market is likely to react adversely. The 4.4 billion euros will come in the form of a state loan to a bank resolution fund which the government insists will be paid back.

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.

Bank of England, the first mover?

carney.jpg

After the European Central Bank kept alive the prospect of printing money and the U.S. economy enjoyed a bumper month of jobs hiring prompting some to bring forward their expectations for a first U.S. interest rate rise, the Bank of England holds a monthly policy meeting.

There is no chance of a rate rise this time but the UK looks increasingly nailed on to be the first major economy to tighten policy, with the ECB heading in the opposite direction and the U.S. Federal Reserve still unlikely to shift until well into next year. Minutes of the Fed’s last meeting, released yesterday, showed general agreement that its QE programme would end in October but gave little sign that rates will rise before the middle of 2015.

The British economy is growing fast and its housing market has been running red hot – prices in London have shot up nearly 26 percent from a year ago – though the BoE says rate rises are not the first tool to deal with that. Britain’s closely-watched RICS housing survey, released overnight, showed signs that some of the heat is starting to come out with its house price balance easing back.

Draghi in London

E

European Central Bank President Mario Draghi will deliver an evening keynote speech in London – the scene for his game-changing “whatever it takes” declaration in 2012.

He is unlikely to come up with anything so dramatic this time but is clearly trying to convince that the ECB could yet start printing money if required to avert deflation.

Draghi has taken the ECB a long way in terms of radical policies which some of its members have found hard to swallow. But QE could yet prove to be a bridge too far. Shortly after Draghi held out the prospect last week of printing euros to ward off deflation, Bundesbank chief Jens Weidmann and his German ECB colleague Sabine Lautenschlaeger mounted a rearguard action.

The Mark and George show

The Mansion House dinner in the City of London is one of Britain’s big set-pieces of the year featuring speeches by Bank of England Governor Mark Carney and finance minister George Osborne.

Carney will be speaking a week before the Bank’s Financial Policy Committee meets and is expected to road test its new tools to calm the housing market. Among other measures, the BoE could recommend caps on the size of home loans granted in relation to a property’s value or a borrower’s salary.

There have been some signs of demand for mortgages slowing of late but London – the real hotspot – is being fuelled by an influx of foreign money which does not require a home loan to buy. The FPC could also suggest the government curbs its “Help to Buy” scheme which helps Britons get on the property ladder.

EU’s top two — oh to be a fly on the wall

Who are the two most important people in the EU? It’s hard to argue against Angela Merkel and Mario Draghi and they meet today in Berlin.

It’s supposed to be a private meeting but of course we’ll be digging, particularly for any signs that the German leader is for or against the European Central Bank printing money if it is required to beat back deflation.

The German media responded negatively to last week’s measures, defaulting to the country’s historic fear of inflation stretching all the way back to the 1920s Weimar Republic although there is virtually no inflation in Europe’s largest economy at the moment. Merkel has given Draghi a fair wind in the past to initiate “unorthodox” policy measures.

Mixed results for right in early voting

The British and Dutch got EU elections underway yesterday and gave only mixed support to the rise of the right.

An exit poll from the Netherlands showed the anti-Islam, Eurosceptic Freedom Party of Geert Wilders’ – which plans to forge an alliance with France’s far-right National Front – had fallen well short of its goal of topping the poll and may even have slumped into fourth place. That would give it three out of the 26 Dutch seats in the EU assembly, down from four in the last elections held in 2009, when it came in second place.

Britain’s anti-EU UKIP seems to be doing much better. There were no indications of how the EU parliamentary vote had gone in Britain, we’ll have to wait for Sunday for that, but parallel local government election results showed a surge in support for the party.
With those results still coming in, Nigel Farage’s party – many call it a one-man band – had secured a net gain of 90 local council seats and was winning well over 20 percent of the vote, mainly at the expense of the ruling Conservatives.

Why EU elections can matter

Some interesting action over the weekend: in a foretaste of this week’s EU elections, Greece’s leftist, anti-bailout Syriza party performed strongly in the first round of local elections on Sunday, capitalizing on voter anger at ongoing government austerity policies.

If it did even better in the EU polls it could threaten the ruling coalition and tip Greece back into turmoil just as there are signs that it has turned the corner.

Bank of England Governor Mark Carney sounded dramatically more alarmed about Britain’s housing market, saying it posed the biggest risk to the economy and harboured deep structural problems.