A tale of two economies

Stock markets in Western Europe and Asia are rallying on the strength of falling oil prices, joining the US in a bull trend. But primary producers, largely dependent on commodity exports, are likely to suffer as a result of falling prices. Australia is no exception.

The S&P 500 continues a primary advance. A conservative target would be 2200*. Rising 13-week Twiggs Money Flow indicates medium-term buying support. Reversal below 2000 is unlikely, but would warn of another correction.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1800 ) = 2200

CBOE Volatility Index (VIX) indicates low risk typical of a bull market.

S&P 500 VIX

Germany’s DAX is testing resistance at its earlier high of 10000. Recovery of 13-week Twiggs Money Flow above the declining trendline suggests medium-term buying pressure. Breakout above resistance would offer a conservative target of 11000*. Reversal below 9000 is unlikely, but would warn of a primary down-trend.

DAX

* Target calculation: 10000 + ( 10000 – 9000 ) = 11000

The Footsie is also testing long-term resistance on the monthly chart — at 6900/7000. The sharp rise on 13-Week Twiggs Money Flow indicates strong medium-term buying pressure, but resistance at the December 1999 high is likely to be solid. Reversal below 6500 remains unlikely.

FTSE 100

China’s Shanghai Composite Index cleared resistance at 2440/2500, signaling a primary up-trend. 13-Week Twiggs Money Flow respect of its rising trendline confirms (medium-term) buying pressure. I remain wary of China. The recent rate-cut by the PBOC is cause for concern, not jubilation.

Shanghai Composite Index

* Target calculation: 2500 + ( 2500 – 2000 ) = 3000

Japan’s Nikkei 225 Index is headed for long-term resistance at 18000. 13-Week Twiggs Money Flow oscillating above the zero line indicates long-term buying pressure. Reversal below 16500 is unlikely.

Nikkei 225 Index

* Target calculation: 16000 + ( 16000 – 14000 ) = 18000

The ASX 200 is undergoing another correction. Respect of support at 5250/5300 would indicate the primary up-trend is intact — but 13-week Twiggs Money Flow reversal below zero warns of strong selling pressure. Breach of support is likely and would warn of a test of 5000.

ASX 200

* Target calculation: 5650 + ( 5650 – 5300 ) = 6000

7 Replies to “A tale of two economies”

  1. Huge amount of commodity price volatility recently in iron-ore, gold,oil and coal.

    Is this reflective of fundamental disturbances to the recognised/accepted underlying economic fundamentals?

    If so, do you think that risks have increased in all the major stock markets to the extent that ( volatility is only one measure of risk, so this indicator may not always be sufficiently relied upon ) decreased overall – rather than switching from Aussie to others you recommend – market exposure is prudent ?

    Thanks

    1. Commodity prices are falling as rising supply meets falling demand. If anything this is exacerbated by the US/Saudis using low oil prices for geopolitical ends. Low commodity prices benefit some economies (China, Japan, EU) while hurting others (e.g. Russia, Australia) — hence the “tale of two economies”. In the long run, this should stimulate global growth. But in the medium-term, commodity exporters will suffer — until rising demand boosts both volumes and prices.

      We monitor a number of risk measures in the global economy (not just VIX) and to-date none are flagging elevated risk.

      1. Thanks. Rapidly falling commodity prices ( including copper and silver – the industrial metals ) aids deflation / dis-inflation……….. it’s this I am referring to in ” fundamental disturbances in accepted economic fundamentals “.

        Regarding deflation/dis-inflation – refer very rapidly falling, and really low, USA inflationary expectations, and price dis-inflation in Euro area ( especially Germany and Italy ) and in China.

        Deflation/dis-inflation is not good, generally, as when asset prices fall/rise less rapidly, but not liability prices ( eg fixed mortgages and other fixed interest loans ) we become markedly financially worse off. Is this not what falling 10-year USA interest rates partly reflect ?

        It may be that – refer 2nd paragraph – USA, Euro area, Australia and China are similarly ( but not equally ) affected = no place to hide = higher risks = lower equity exposures.

        Just a thought … best wishes

      2. We need to distinguish between falling prices and deflation caused by a contraction of the money supply. The former is largely benign while the latter is a serious threat because of the feedback loop between contracting credit and falling asset prices (stocks and property) that leads to a deflationary spiral.

        The ECB has already contracted the money supply and the fact that the EU economy is still standing is testament to its resilience. I believe the ECB has finally realized their mistake and will take steps to correct this over the next 12 months. That is the primary reason for the difference in economic performance between the US and EU.

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