While there may be some confusion about why massive bond buying greeted yesterday's "better than expected" loss of 209 jobs in the 25-54 age group, dragging stocks down, the answer is actually very simple: there is a war in the Ukraine.

A war which just took a turn for the worst after at least 42 people were killed according to Reuters in street battles between supporters and opponents of Russia in southern Ukraine that ended with dozens of pro-Russian protesters incinerated in a burning building. The riot in the Black Sea port of Odessa, ending in a deadly blaze in a besieged trade union building, was by far the worst incident in Ukraine since a February uprising that ended with a pro-Russian president fleeing the country.

The clip below, not for the faint of heart, shows anti-government protesters jumping from the burning Odessa trade unions house: it appears when Yanukovich was "killing" protesters in February, the west couldn't get up in arms fast enough screaming for the former president's overthrow. But now that the acting post-CIA funded coup government is doing the same thing to its own protesters, the radio silence is stunning.

But while yesterday's tragic events in Odessa were the first time the Ukraine conflict manifested itself in pro and anti-Russian clashes in the Black Sea town, it will hardly be the last: not only does the port city have economic and military significance, it also sits between Crimea and pro-Russian areas in eastern Ukraine and the breakaway Transnistria region of neighboring Moldova.

The admission of the true state of affairs finally came from Kiev itself which said that Ukrainian forces pressed their assault on separatists today, freeing up a regional airport as the head of the country’s anti-terrorist center warned eastern regions are “essentially” at war.

The campaign in the Donetsk region left five dead from the Ukrainian anti-terrorist operation and 12 wounded, said the center’s chief, Vasyl Krutov, at a Kiev briefing, even as military observers were freed by anti-Kiev militants. Government forces have secured the town of Slovyansk as operations in Kramatorsk continue.

“What is happening in the east is not a short-term action, this is essentially a war,” Krutov said today.

War it is:

Open clashes are sweeping Ukraine’s east, from Donetsk near the Russian border to Odessa, about 100 miles from the European Union’s southeastern frontier in Romania, amid signs the industrial and coastal regions are slipping out of the Kiev government’s control. The U.S. and the European Union accuse Russia of being behind the unrest, while Russian President Vladimir Putin is “extremely concerned” and is studying the situation, his spokesman Dmitry Peskov, said today.

There was some good news: military observers from the Organization for Security and Cooperation in Europe who were taken hostage a week ago were freed and will be delivered to the Council of Europe in Slovyansk near Donetsk, the council said today in a statement.

Bloomberg reports further that the U.S. and EU accuse Russia of stirring unrest to undermine Ukraine’s May 25 presidential election. Polish Prime Minister Donald Tusk said at a briefing today in Jezioro, Poland, that officials are “losing hope” about a diplomatic solution to end the crisis.

“This is a war of maybe a different kind, it is a war that’s undeclared,” Tusk was quoted as saying by PAP newswire at a media briefing. “But what we’re really dealing with is de-facto a war. You can clearly see that actions taken by the international community haven’t brought results.”

To be sure, Ukraine and NATO is putting all the blame on Russia - not only for instigating the conflict but arming the separatists, seemingly oblivious of factual evidence that it was the US that was doing precisely the same just over three months ago when it was orchestarting the overthrow of the then government.

Ukraine’s Defense Ministry said the use of advanced weapons showed the separatists were “professional saboteur groups” rather than peaceful protesters. In a statement, it called their tactics “characteristic of foreign military or mercenaries.” Turmoil erupted yesterday in Odessa, where more than 130 people had been detained by police, with 10 criminal cases already started, according to Petro Lutsyuk, the head of the Interior Ministry’s directorate in the city, said on the agency’s website. The Interior Ministry later said on its website that Lutsyuk was fired. The nearby city of Nikolaev hosts much of the country’s defense and shipbuilding industry, as well as Zorya-Mashproekt, a state enterprise that manufactures gas turbines for OAO Gazprom (GAZP), the Russian natural gas producer and exporter.

Meanwhile, the theater by western leaders hit a new peak yesterday when Obama and Merkel did all they could: threaten more sanctions. At their news conference in Washington, Obama and Merkel said Russia must pull back support for the separatists so Ukraine’s May 25 presidential election can go ahead unimpeded. If the vote can’t be held, “we will not have a choice but to move forward” with more sanctions, Obama said. Merkel called the election “crucial” and said she’s ready to support economic sanctions if needed.



Ironically, it is German commercial interests which as we said back in March, are doing all they can to prevent sanctions of Russia as they know well they would be the biggest losers. Germany is Europe’s largest economy and had $127 billion in trade with Russia in 2013, according to the International Monetary Fund, making Germany is Russia’s second-biggest trading partner. Putin has threatened to escalate economic warfare if further sanctions are imposed.



“When we will reach a particular tipping point is very hard to say in advance,” Merkel said. “But all I can say is that the elections on May 25 are a decisive juncture for me and if there is further destabilization, things will get more and more difficult.”

Expect more furious bluster out of Germany and Obama, hoping that verbal escalation will finally cause Putin to pull back. It won't. Meanwhile Putin is keeping quiet. Which is the second good news because as we showed yesterday, all Putin has to do is give the command.