Gold rallied off support at $1200/ounce and is headed for a test of the declining trendline. Expect resistance between $1300 and the former primary support level of $1340. The primary trend is down and resistance is likely to hold. Respect of resistance would indicate another test of $1200 — and offer a target of $1100 if support fails.
* Target calculations: 1350 – ( 1500 – 1350 ) = 1200; 1200 – ( 1300 – 1200 ) = 1100
Japan’s Nikkei 225 broke resistance at 13500, indicating the correction is over. Expect a re-test of the May high at 16000. Reversal below 13500, however, would mean another test of 12500. A trough above the zero line on 21-day Twiggs Money Flow would indicate a healthy primary up-trend.
Dow Jones Shanghai Index respected support at 250, the long tail on both the $DJSH and Shanghai Composite indicating strong buying pressure. Expect a rally to test resistance at 275 (2150 on the Shanghai Composite), but the primary trend remains downward and resistance at 275 (2150) is likely to hold.
India’s Sensex rallied off its rising trendline, suggesting that the primary up-trend will continue. Follow-through above 19500 would indicate a test of resistance at 20000/20200. Bearish divergence on 13-week Twiggs Money Flow continues to warn of a reversal and would only be refuted by a breakout above 20200 (or a rise above the May peak on TMF).
The ASX 200 respected its descending trendline at 4800 and is headed for another test of support at 4650. A peak below zero on 21-day Twiggs Money Flow would indicate a healthy down-trend. Breach of 4650 would test the key long-term support level of 4400, while respect would mean another test of 4900. In the longer term, respect of 4400 would be bullish, but failure of support would be a strong bear signal.
The ASX Small Ordinaries, by contrast, exhibits a stronger bullish divergence on 21-day Twiggs Money Flow, indicating buying support. Breakout above 1960 would indicate the latest primary decline is over, while reversal below 1880 would offer a target of 1800. Small Caps have been badly mauled over the last two years and at some point will present an opportunity to value investors. Unfortunately that end is not yet in sight.
The S&P 500 rally appears to be faltering. Reversal below 1600 would suggest another decline, with a target of 1500*. Breach of support at 1560 would confirm, while reversal of 21-day Twiggs Money Flow below zero would strengthen the signal.
The June quarter ended with the S&P 500 above its new support level at 1550. Respect of the zero line by 13-week Twiggs Money Flow indicates a healthy up-trend, but the tall shadow (or wick as some call it) on the latest candle suggests otherwise. Reversal below 1500 would warn of a correction to the rising trendline, around 1400.
Breakout of VIX above 25 would signal increased market risk.
A false break below primary support on the TSX Composite index was followed by a rally above 12000. Follow-through above the descending trendline would suggest that the correction is over, but a 21-day Twiggs Money Flow peak below zero would warn of selling pressure — and reversal below 11900 would confirm the primary down-trend.
I am not sure of the background to this, but it certainly looks as if the big UK banks were able to exert enough political pressure to remove Robert Jenkins from the Financial Policy Committee, the UK’s new stability regulator. Anne-Sylvaine Chassany at FT writes:
An outspoken advocate of tough bank regulation who has worked in banking and asset management, Robert Jenkins left the committee earlier this year after not being reappointed by George Osborne, chancellor.
If bankers’ influence was the cause, it certainly is cause for concern.
Anne-Sylvaine Chassany at FT writes of the UK’s Prudential Regulation Authority:
The PRA irked banks when it included a 3 per cent leverage ratio target in its assessment of UK lenders’ capital health. It identified shortfalls at Barclays and Nationwide, the UK’s largest building society, which have projected leverage ratios of 2.5 per cent and 2 per cent respectively under PRA tests.
Outrageous isn’t it? That banks should be asked to maintain a minimum share capital of three percent against their lending exposure — to protect the British taxpayer from future bailouts. My view is that the bar should be set at 5 percent, although this would have to be phased-in over an extended period to prevent disruption.
I hope that APRA is following developments closely. The big four Australian banks are also likely to be caught a little short.
Read more at Barclays’ threat on lending under fire – FT.com.
Kellie Tranter highlights the unstable position of the big Australian banks:
Australia has had a current account deficit since the 1980s. That means we are spending more than we are earning. We’ve had to sell public assets to balance the current account deficit. Put simply, the surplus on the capital account is flogging off the sideboard to buy the fruit.
Our net international financial position is not strong and our gross foreign liabilities are alarming. Banks are the intermediaries between foreign lenders and Australia’s big spenders. The banks have mediated the private household debt and as a result if there is a worldwide recession, banks could be called to pay up.
Our banks have borrowed short (internationally) and lent long (domestically, for mortgages etc.)…….
I have been sounding off about the inadequate capital reserves of the big four banks — because of low risk-weightings attached to residential mortgages — but Kellie also raises the question of their $13.8 trillion derivatives exposure. She concludes:
If the banks are hunky dory why is it necessary [for the RBA] to set up a $380 billion emergency fund and, more importantly, is it enough in light of possible derivatives exposure?
Read more at Lurking beneath Australia's AAA economy… – On Line Opinion – 25/6/2013.
The youth riots in Brazil, Chile, the European Union, the Arab Middle East, Turkey, and even the “Occupy” movement in the West all reflect what political theory broadly calls the “legitimacy crisis” of modern democracy – the notion that participation in democratic politics does little to change the actual process of government, that elites are dug-in and immoveable, that cronyism is endemic, and so on. Young voters particularly become cynical of the formal electoral process, either dropping out in disdain, or expressing their grievances “extra-parliamentarily”, i.e., on the street.
Read more at Will These Youth Protests Spread to Asia’s Corrupted Democracies? | The Diplomat.
This comment by Tim Congdon (International Monetary Research Ltd) on the UK shadow Monetary Policy Committee refers to the “regulatory blight” on banking systems as regulators switch from risk-weighted capital ratio requirements to a straight-forward, unweighted leverage ratio which requires some banks to raise more capital. What he fails to consider is that risk-weighting has contributed to the current parlous state of our banking system. Under risk-weighting, banks concentrated their assets in classes with low risk-weighting, such as residential mortgages and sovereign government bonds, where they were required to hold less capital and could achieve higher leveraged returns. The combined effect of all banks acting in a similar manner achieved a vast concentration of investment exposure in these asset classes, with the undesirable consequence that the underlying risk associated with these asset classes soared, leading to widespread instability across the banking system and fueling both the sub-prime and Euro zone sovereign debt crisis.
My last note for the SMPC opened with the sentence, ‘The regulatory blight on banking systems continues in all the world’s so-called “advanced” economies, which means for these purposes all nations that belong to the Bank for International Settlements.’ As I explained in the next sentence, the growth of banks’ risk assets is constrained by official demands for more capital relative to assets, for more liquid and low-risk assets in asset totals, and for less reliance on supposedly unstable funding (i.e., wholesale/inter-bank funding). The slow growth of bank assets has inevitably meant, on the other side of the balance sheet, slow growth of the bank deposits that constitute most of the quantity of money, broadly-defined. Indeed, there have even been periods of a few quarters in more than one country since 2007 in which the assets of banks, and hence the quantity of money, have contracted.
The equilibrium levels of national income and wealth are functions of the quantity of money. The regulatory blight in banking systems has therefore been the dominant cause of the sluggish growth rates of nominal gross domestic products, across the advanced-country world, that have characterised the Great Recession and the immediately subsequent years. Indeed, the five years to the end of 2012 saw the lowest increases – and in the Japanese and Italian cases actual decreases – in nominal GDP in the G-7 leading industrialised countries for any half-decade since the 1930s.
It is almost beyond imagination that – after the experience of recent years – officialdom should still be experimenting with different approaches to bank regulation and indeed contemplating an intensification of such regulation. Nevertheless, that is what is happening. The source of the trouble seems to be a paper given at the Jackson Hole conference of central bankers, in August 2012, by Andy Haldane, executive director for financial stability at the Bank of England. The paper, called The Dog and the Frisbee, argued that a simple leverage ratio (i.e., the ratio of banks’ assets to capital, without any adjustment for the different risks of different assets) had been a better pointer to bank failure than risk-weighted capital calculations of the kind blessed by the Basle rules. The suggestion is therefore that the Basle methods of calculating capital adequacy should be replaced by, or complemented by, a simple leverage ratio.
For banks that have spent the last five years increasing the ratio of safe assets to total assets, or that have always had a high proportion of safe assets to total assets, the potential introduction of a leverage ratio is infuriating. A number of banks have been told in recent weeks that they must raise yet more capital. Because it is subject to the new leverage ratio, Nationwide Building Society has been deemed to be £2 billion short of capital. That has upset its corporate plans, to say the least of the matter, and put the kibosh on significant expansion of its mortgage assets. And what does one say about George Osborne’s ‘Help to Buy’ scheme, announced with such fanfare in the last Budget and supposed to turbocharge the UK housing finance market?
The leverage ratio has been called Mervyn King’s ‘last hurrah’, since there can be little doubt that King has been the prime mover in the regulatory tightening that has hit British banking since mid-2007. He is soon to be replaced by Mark Carney, who may or may not have a different attitude. Carney has been publicly critical of Haldane and his ‘Dog and Frisbee’ paper, but that does not guarantee an early shift in the official stance. Indeed, it is striking that – of the bank’s top team under King – only Paul Tucker, generally (and correctly) regarded as more bank-friendly than King or Haldane, has announced that he is leaving the Bank once Carney has taken over.
My verdict is that the regulatory blight on UK banking is very much still at work. Further, without QE, the quantity of money would be more or less static. As before, I am in favour of no change in sterling interest rates and the continuation of QE at a sufficiently high level to ensure that broad money growth (on the M4ex measures) runs at an annual rate of between 3% and 5%. My bias – at least for the next three months – is for ‘no change’. It is plausible that I will be advocating higher interest rates in 2014. However, much depends on a realisation in official quarters that overregulation of the banks is, almost everywhere in the advanced world, the dominant explanation for the sluggishness of money supply growth and, hence, the key factor holding back a stronger recovery. Major changes in personnel may be in prospect at the Bank of England now that Mervyn King is leaving, but the Treasury – which I understand from private information will be glad to see the back of him – has failed to prevent the growth of a regulatory bureaucracy led by King appointees.
If having a well-capitalized banking system requires some “regulatory blight” then lets have more of it. Three cheers for Mervyn King and the (un-weighted) leverage ratio. Let’s hope that Mark Carney follows a similar path.
via David Smith’s EconomicsUK.com: IEA’s shadow MPC votes 5-4 for quarter-point rate hike.
The euro fell through support at $1.32 and is headed for a test of primary support at $1.27*. Failure of support would complete a broad head and shoulders reversal, offering a target of $1.17*. Descending 13-week Twiggs Momentum suggests a primary down-trend.
* Target calculation: 1.27 – ( 1.37 – 1.27 ) = 1.17
Pound Sterling is headed for a test of support at $1.50 against the greenback. A 13-week Twiggs Momentum peak below zero suggests a primary down-trend. Failure of support at $1.50 would confirm.
The greenback is headed for a test of ¥100 against the Yen, after finding support at ¥94. The primary trend is upward and recovery above ¥100 would signal a fresh advance with a target of ¥114*. A 13-week Twiggs Momentum trough above zero would strengthen the signal. Respect of resistance at ¥100, however, would warn of reversal.
* Target calculation: 104 + ( 104 – 94 ) = 114
Canada’s Loonie found support at $0.95 against the greenback, not $0.96 as expected. Recovery above $0.96 would suggest a rally to test the descending trendline around $0.98*.
* Target calculation: 0.97 – ( 1.00 – 0.97 ) = 0.94
The Aussie Dollar displays a small flag as it rallies to test resistance at $0.94 against the greenback. Respect of resistance is likely and would suggest a decline to $0.90*.
* Target calculation: 0.92 – ( 0.94 – 0.92 ) = 0.90
Gold is falling fast, but should find short/medium-term support at $1200/ounce*. Breach of that level would offer a target of $1000.
* Target calculations: 1350 – ( 1500 – 1350 ) = 1200; 1500 – ( 1800 – 1500 ) = 1200
Silver similarly offers a target of $16/ounce*.
* Target calculation: 26 – ( 36 – 26 ) = 16
The Dollar Index respected its primary trendline at 80.50 and is headed for another test of 84. The 13-week Twiggs Momentum trough above zero suggests a strengthening up-trend. Target for a breakout would be the 2010 high at 89*.
* Target calculation: 84 + ( 84 – 79 ) = 89
Crude is range-bound, with Nymex WTI retreating after a false break above resistance at $98/barrel and Brent testing support at $100. The spread has narrowed to $6 and is likely to close further as the US economy recovers faster than Europe. Brent is in a down-trend, while Nymex continues to threaten a primary up-trend, reflecting the stronger US economy.
The Dow Jones/UBS Commodity Index is falling hard, more in sympathy with gold than with crude, as the dollar strengthens. A rapidly weakening Chinese economy is likely to drag commodity prices even lower. Breakout below long-term support at 125/126 would offer a target of the 2009 low at 100*.
* Target calculation: 125 – ( 150 – 125 ) = 100
