A quieter week ahead ?

Summary : 

Russia seems to have backed away from escalation in Ukraine. Moscow thinks the advent of winter and a shortage of energy will bring Kiev and the EU to the negotiating table. Sanctions are seen as a sop by Obama to the McCain-Graham vocal right. Moscow sees a hike in oil prices to the $110 level is seen a useful counterbalance to sanction costs.

The 10% lightening of non-dollar assets put in place two weeks ago was timed right but markets may now rally. Time to buy EU non-banks.  

In the ECB the exit timing of Draghi increasingly  is tied to the failing health of Giorgio Napolitano the Italian President. Will Jens Weidmann replace Draghi ? Will ECB QE be €600 billion as touted by some IB's or something less ? Will the CC in Karlsruhe become involved ? 

For Obama the return to Iraq ticks all the boxes - allies are reassured, foes made to think again,  the Christian right quieted, oil exports from the Kurdish regions secured and markets reassured. Sisi has arranged another ceasefire in Gaza - one will eventually hold. In Iraq Maliki fired weapons against Mosul - Sunnis are coming to the opinion there is little difference between the Shia government in Iraq and the Caliphate. Al-Qaeda is the real winner.

Markets could fly if Xi and Abe reach agreement over the Sakuku's at APEC in November. With ECB QE more likely sooner rather than later if Draghi moves to the Lateran the bull run could pick up steam again even as Dr.Yellens mood music fades.

In the EU Juncker is under strong pressure to appoint the Polish FM Radek Sikorski as the new Representative for foreign affairs. Italy strongly opposes this.

Ukraine : There was a time last week when Moscow's Federal Security Council gave serious thought to sending in Russian ground forces in a ''humanitarian peacekeeper'' role . Markets reacted strongly to this fresh fear with sharp declines in the DAX and CAC 40. However, by Friday there were signs that Putin had backed away from escalation and was content to stick with its initial strategy - use Spetnatz troops to keep the rebel uprising from being defeated and wait for the onset of winter to starve Ukraine of energy and bring the Kiev government to negotiate. Moscow has taken the view that sanctions have less bite than expected and are primarily designed to appeal to right wing critics in both houses.

Putin's domestic popularity remains high. The government is united in its view that EU or NATO association for Ukraine is a strategic threat to the Russian Federation that cannot be allowed to happen. The sanctions have proven to be an irritant in the near term coming on top of a slowing economy - private pensions have been diverted to the State Budget as they were in 2013 and there are discussions about the reintroduction of mild exchange controls for foreign owners of certain classes of domestic debt - but the CB believes that by November higher oil and gas price should provide a net benefit to the balance of payments. The ban on imported agricultural products ( a $12 bn a year business ) can largely be covered by the use of imports from New Zealand, the RSA and SE Asian middlemen. Bank financing doesn't become a major issue until 2016 although second tier equities are heavily exposed to western financing.

The Security Council has opted for a mild version of autarky although wiser voices amongst its members are doubtful whether this is achievable. Some analyses show non-resource sector ROIC turning negative in 2015 without additional state orders and backing. The governments goal nonetheless marks the end of 25 years of accelerating Russian integration into the global economy. 

Iraq: Interesting development . Obama was almost forced into intervening as a signal to Russia and China ( and America's increasingly nervous allies ) that Washington had not turned its back on global events. Markets may well view this intervention as being a net positive.

Japan - China : The Diaoyu-Senkaku island dispute still our major worry. Beijing is unlikely to act by force in the immediate future but there are those in Beijing who would like to see a removal of this bottle neck by the time the new series of deep water Jinn SLBM's are fully operational by decade end. The waters near th disputed islands, the high seas of the western Pacific and the airspace over the East China Sea are all vital for the PLA Navy and CCG deployment of these new assets. Blue water contact with the Contact with JDF forces is increasing . Japan insists on its rights to international waters, the PLA has demonstrated its commitment to keeping foreign vessels and aircraft away from its units. Although a Code for Unplanned Encounters at Sea has been discussed Beijing say that the political environment prevents it being formalised. We would need to see a Xi-Abe meeting at the APEC summit in November to feel comfortable that tensions are being reduced. A succesful meeting could see a sharp turnaround in Far East flows out of risk assets with new highs across all asset classes.

The Vietnamese standoff with Beijing was resolved by the Chinese withdrawing an oil rig from Vietnamese waters an by Hanoi delaying a provocative ( in Chinese eyes ) trip to DC by their Foreign Minister. There is no sign of such sensitivity in Chino-Japanese relations. This is the issue that if left unresolved could cause markets to fall 50%.

Scotland : Gilts traders will be happy that the first debate went so convincingly to the pro-Union camp. A second debate on July 25th is likely to be more evenly matched. The pro-Independence parties have started on a major canvasing campaign in the poorer , traditionally non-voting, areas of the Central Lowlands. We stand by our long term forecast of a 54-46 vote in favour of staying within the UK. However, the pro-Union sentiment is arguably now at its high point.

ECB and QE : Jens Weidmann continues to manoeuvre to replace Mario Draghi at the ECB. A recent health scare with Italy's President Napolitano has raised the likelihood that Draghi may step down from the ECB and take up the position of Italian President sooner than summer 2015. Paris and Madrid have been canvassing to see what other states might object to a German at the helm of the ECB - Italy in this instance could hardly object. Prime Minister Renzi continues to believe that constitutional reform ( and a new President ) are necessary if lasting change is to be implemented in the Italian economy. Markets may not be a lenient inn their time horizons. 

Gaza : A tragedy but as long a Egypt and Saudi provide covert backing for Israel the situation remains containable. The larger issue of Iran's place in the mid-East remains uncertain. US and UK military action in Iraq is a sign to Tehran that resistance to their policies is increasing. What this means for the stalled nuclear negotiations remains dependent on how Russia responds. Moscow has sold S-400 air defence batteries to the PRC. Will they follow up with a sale to Iran ? this would make the country's nuclear facilities a no-g0 area for the Israeli Air Force.

Cuba : The government is actively courting both Moscow and Beijing to replace Venezuela as its major source of capital. This is a win win for China but stymies any hopes there were for the Obama administration to east the trade embargo.

Early event alerts 

Frank-Walter Steinmeier and Vice Chancellor Gabriel have had to put on hold hopes for a Berlin-Moscow-Paris alliance. However their reluctance over sanctions raises questions as to whether NATO is fit for purpose.

Baltic States watching developments are wondering whether €uro accession provides the security guarantees that they had hoped for.