MacroScope

10 days to define the United Kingdom

The Flag of Scotland, the Saltire, blows in the wind near Berwick-upon-Tweed on the border between England and Scotland

The earthquake may be about to happen. Over the weekend the first opinion poll putting the independence campaign ahead landed with a resounding thump.

That prompted the UK government to rush forward to this week plans to spell out what further devolved powers Edinburgh would get if the Scots vote to stay on Sept. 18.

With the caveat that the last two dramatic polls have both been from one group – YouGov – and others have suggested “No” remains ahead, it seems momentum is well and truly with Alex Salmond.
In response, sterling has fallen about 1 percent in Asian trade to its weakest level in nearly 10 months. The pound has now dropped the best part of three percent against the dollar this month. The banks and other business will now be seriously alarmed as well.

The latest polls show that if the union holds together it will be old people that will have delivered. Women and Labour supporters, previous “no” strongholds, are deserting fast if YouGov has it right.
The other question is whether there will be a “shy No” vote. In the 1980s many Britons wouldn’t admit publicly to voting for Margaret Thatcher but then did in the privacy of the ballot box, so her poll ratings often underplayed the reality. This time, the bold thing to do is vote Yes and the independence campaign has been robust to say the least. So it’s possible there are a voters who won’t admit to it but will put their cross by “No” a week on Thursday.

In the 1995 Quebec independence campaign, the “Yes” camp was well ahead with a week to go and lost by a whisker.

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.

What’s it all about, Mario?

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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.

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”.

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.

Moment of truth in Ukraine

A Ukrainian serviceman guards a checkpoint near Donetsk

Financial markets perked up on Monday after Russia called off military exercises near the Ukraine border but was the confidence well founded?

NATO’s chief told Reuters there was a “high probability” Russia could launch an invasion of Ukraine where the government said it was in the “final stages” of recapturing Donetsk, the main city held by pro-Russian rebels, a battle that could be a decisive turning point in the biggest confrontation between Russia and the West since the Cold War.

Vladimir Putin must now decide whether to leave the rebels to their fate or step up his support. Thousands of Russian troops are still massed near the border and a Russian convoy of 280 trucks carrying humanitarian aid for Ukraine set off on Tuesday amid Western warnings against using help as a pretext for an invasion.