MacroScope

Market selloff – blip or new crisis?

A trader watches the screen in his terminal on the floor of the New York Stock Exchange in New York

A two-day summit of EU and Asian leaders, which was going to be most notable for a meeting between the heads of Russia and Ukraine, risks being overtaken by financial market tremors which have spread worldwide.

There’s a good case that markets, primed with a glut of new central bank money, had climbed to levels which the state of the economies that underpin them did not justify. With the Federal Reserve about to turn its money taps off, investors seem to have woken up to poor growth prospects in much of the world.

On the other hand, yesterday’s sell-off was sparked at least in part by some sub-par U.S. data and it’s hard to argue that prospects for the world’s largest economy have suddenly taken a turn for the worse.

For Europe – parts of it at least – this is dangerous. If the market rout continues it will hit already-fragile business and consumer confidence and curb spending and investment. The euro zone will be hoping its final September inflation figures, due this morning, are not revised down from a paltry 0.3 percent.

As tumbling stock markets took many of the headlines yesterday, Greece’s 10-year borrowing costs zoomed close to 8 percent – way above the level that would allow Athens to quit the bailout programme hated by its people and return to financing itself on the markets.

Shocking German figures

A new Mercedes AMG GT super sports car rim is seen during a factory tour for journalists at the Mercedes AMG headquarters in Affalterbach

After a stunning fall in German industrial orders for August – the 5.7 percent monthly drop was the largest since the global financial crisis raged in 2009 – industrial output for the same month has just plunged by 4.0 percent, also the biggest fall in five years.

After Europe’s largest economy shrank in the second quarter there had been hope of a pick-up in the following three months but the thrust of recent data suggests it will be lucky to achieve any expansion at all.

At the same time, the government – particularly finance minister Wolfgang Schaeuble – vehemently rejects calls from euro zone and G20 peers for greater efforts to get growth going.

Turkey poised to intervene?

Iraqi Shi'ite militia fighters stand atop destroyed vehicles belonging to Islamic State militants outside Bo Hassan village near Tikrit

Turkey’s parliament has voted to give the government a green light to order military action against Islamic State as the insurgents tightened their grip on a Syrian border town, sending thousands more Kurdish refugees into Turkey.

There is little sign of it being put into imminent use but the vote gives the government powers to order incursions into Syria and Iraq to counter the threat of attack “from all terrorist groups”. By common consent, western air strikes alone are unlikely to vanquish IS and there is a great deal of doubt that Syrian and Iraqi forces can best them on the ground.

Service sector PMI surveys for euro zone member states, Britain and others are forecast to show France and Italy languishing in contractionary territory while Spain achieves quite strong growth.

After “get in the hole!”, Europe remains in a hole

Team Europe golfers pour champagne over captain Paul McGinley as they celebrate retaining the Ryder Cup at Gleneagles

Who says Europe is broken? The Ryder Cup stays here again and even Nigel Farage, leader of Britain’s anti-EU party, said he wanted Europe’s golfers to win.

The euro zone is not winning the economic competition however, despite the European Central Bank’s best efforts (it should be noted that only 3 of the 12 Ryder Cup team come from euro zone countries).

Prior to the ECB’s monthly policy meeting on Thursday, we get German inflation for September data today.

Britain to join the fray

A pair of U.S. Air Force F-15E Strike Eagles fly over northern Iraq

The British parliament will vote today on whether UK forces should join U.S.-led air attacks against Islamic State militants. Any action will be confined to Iraq, which has asked for help, not Syria where IS also controls swathes of territory. Prime Minister David Cameron has promised a separate vote on that if it comes to it.

Unlike last year when action to stop Syria’s Bashar al-Assad using chemical weapons against his own people was voted down, all the main parties appear to be broadly in support, probably swayed by the beheading of captives by the Sunni militants.

There shouldn’t be much difficulty arguing that the group poses a threat to Britain and its interests. Iraq’s prime minister said overnight that Baghdad had “credible” intelligence that Islamic State militants plan to attack subway systems in Paris and the United States. The attacks, he said, were plotted from inside Iraq.

Not really that close

Scotland's First Minister Alex Salmond speaks at the "Yes" Campaign headquarters in Edinburgh, Scotland

So what was all the fuss about?

A first rough draft of history would suggest the one opinion poll that gave the independents a lead nearly two weeks ago scared the Bejesus not only out of the British establishment but a significant chunk of Scottish voters too.

Prime Minister David Cameron has addressed the nation, promising to deliver new powers to Edinburgh to a very tight timetable, drafting laws in January in order to have it done after the 2015 general election.

He also promised more devolution for Northern Ireland, Wales and England, which is tantamount to a fiendishly complicated constitutional overhaul. It is not clear that the opposition Labour party is on the same page.

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.

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.

A turning point?

Emergencies Ministry members work at the site of a Malaysia Airlines Boeing 777 plane crash in the settlement of Grabovo in the Donetsk region

Could the shooting down of a Malaysia Airlines plane over Ukraine be a fundamental turning point in the crisis that has pitted Russia against the West? And if so which way – towards rapprochement or a further escalation?

Kiev accused militants fighting to unite eastern Ukraine with Russia of shooting down the Boeing 777 carrying nearly 300 people from Amsterdam to Kuala Lumpur with a Soviet-era ground-to-air missile. Leaders of rebels in the Donetsk People’s Republic denied any involvement, although around the same time their military commander said his forces had downed a smaller Ukrainian transport plane.

A Ukrainian Interior Ministry official took to Facebook shortly after the plane came down, saying that rebels had used a Buk anti-aircraft system given to them by Russia, and appealed to the West to act. That doesn’t make the situation much clearer since Russia, Ukraine and the separatists all probably have the missile in their arsenals.

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.