Investors have now pulled more than $130 billion out of mutual funds that invest long term in United States stocks, since May 1.
…..In the six months ending October 31, $114.8 billion already had been pulled out of U.S. stock funds. The peak was in August, when Standard & Poor’s downgraded the rating of U.S. government debt. That month $26.3 billion was pulled out. But the pullout has stayed above $14 billion every month since.
The euro is likely to re-test primary support at $1.32 against the greenback. Declining 63-day Twiggs Momentum, below zero, warns of continuation of the primary down-trend. Breach of support would indicate a primary decline to $1.22*.
* Target calculation: 1.32 – ( 1.42 – 1.32 ) = 1.22
Sterling rallied off primary support at $1.53/$1.54 against the greenback but 63-day Twiggs Momentum again warns of a primary down-trend. Failure of support would offer a target of $1.46*.
* Target calculation: 1.53 – ( 1.60 – 1.53 ) = 1.46
Canada’s Loonie is headed for another test of resistance at $1.01 against the greenback. Declining 63-day Twiggs Momentum, however, continues to warn of a primary down-trend. Respect of resistance is likely, and would signal another test of primary support at $0.95. Declining commodity prices also favor a down-trend.
* Target calculation: 0.95 – ( 1.01 – 0.95 ) = 0.89
The Aussie Dollar appears stronger than the Loonie, which is unusual. Both are affected by commodity prices, but the Aussie tends to be more volatile than its Canadian counterpart. Obviously, higher interest rates in the Southern hemisphere are an attraction. Again, 63-day Twiggs Momentum warns of a primary down-trend. And reversal below parity would warn of another test of primary support at $0.95.
* Target calculation: 0.95 – ( 1.07 – 0.95 ) = 0.83
The greenback has strengthened sharply against the South African Rand and Brazilian Real. Both volatile, resource-rich currencies are likely to re-test their recent highs: the rand at R8.50 and the real at 1.90 against the dollar.
The greenback shows strong bullish divergence against Japan’s yen on 63-day Twiggs Momentum, warning of a reversal. Breach of the long-term descending trendline would strengthen the signal. Breakout above ¥80 would confirm.
The Dollar Index is testing support at 78.00. Narrow consolidation above the support level indicates weakness. Recovery above 79.00 would relieve this, while failure of support would warn of another test of primary support at 75.00. Rising 63-day Twiggs Momentum, well above zero, however, suggests continuation of the up-trend.
* Target calculation: 80 + ( 80 – 75 ) = 85
Spot gold is also weak as safe haven demand for both the yellow metal and the dollar has eased. Reversal below $1670 would signal another test of primary support at $1600. Declining 63-day Twiggs Momentum suggests further weakness but the long-term outlook remains bullish with the indicator comfortably above the zero line.
* Target calculation: 1800 + ( 1800 – 1700 ) = 1900
Increased tensions with Iran are supporting the price of Brent Crude above $105/barrel. Narrow oscillation of 63-day Twiggs Momentum around the zero line indicates uncertainty. Failure of support (and respect of the descending trendline) would indicate another primary decline with a target of $85*. Breach of primary support at $99 would confirm.
* Target calculation: 100 – ( 115 – 100 ) = 85
The CRB Commodities Index respected its descending trendline, suggesting a primary decline to $265*. Follow-through below short-term support at $305 would strengthen the signal, while breach of primary support at $295 would confirm. The Aussie Dollar and Canada’s Loonie both closely follow commodity prices and can be expected to follow the CRB index lower.
* Target calculation: 295 – ( 325 – 295 ) = 265
Economists expect 2012 will see a slowdown in the economy of China, Australia’s biggest trading partner. China’s gross domestic product growth could slip to around 8% from more than 9% this year, which will lead to lower demand for commodities. Already, the Reserve Bank of Australia’s index of commodity prices—a weighted basket of Australia’s resource sector exports—has fallen sharply this year. The central bank says the economy’s resources-led surplus may have hit its peak and could decline “somewhat” from here.
via Heard on the Street: Australia’s Juggling Act – WSJ.com.
“….Copper is telling us that while the U.S. equity markets are being priced by such frivolous things as U.S. holiday retail sales, the global economy is experiencing a deceleration in growth [that will become evident] in the first half of next year,” said Jason Schenker, president and chief economist at Prestige Economics LLC.
BlackRock, the nation’s largest exchange-traded fund purveyor, said Wednesday that exchange-traded funds that invest in gold generated $4.8 billion in net new assets in November. That meant gold outperformed any other category of ETF, including fund that invest in bonds or stocks…….The rush to gold reflected increasing investor concern that gold is a safer place to put money than currencies or sovereign debt, given the European debt crisis and the high deficit and debt levels in the United States, according to Kevin Feldman, managing director for the iShares line of exchange-traded products from BlackRock.
According to analysts at Morgan Stanley, Spain could acquire the entire €176 billion pile of impaired real-estate assets at the 58% discount applied by Ireland’s bad bank, or a cost of €73.9 billion. This could be funded by swapping new government debt for the banks’ soured real-estate assets.
However, the state would have to raise sufficient funds from investors to provide the banks with an estimated €28.5 billion in new capital to absorb losses that the banks would take in selling the assets at a steep discount. In all, the cost of the plan to the Spanish state could be €102.4 billion, or around 10% of Spanish GDP.
via Spain Weighing a Fast, Costly Cleanup of Banks – WSJ.com.
Colin Twiggs: ~ Spain faces the same tough choice as the Irish: rescue its banks, by putting its own finances at risk, or endure a massive recession as the banking system implodes and the flow of credit dries up. The first choice may be the least painful but will mean many years of austerity in order to bring government debt back below 60% of GDP.
Citigroup chief economist Willem Buiter:
There really is no politically feasible route back to sustained economic growth through monetary and/or demand stimulating policies for the EA, the UK, the US and Japan, for many years to come. As regards demand stimulus, expansionary fiscal policy will not be punished by the markets to the point of being self-defeating for all EA member states except for Germany (which will not do it on any significant scale for domestic political reasons). The US also may be technically able to use fiscal expansion to stimulate demand, but even if markets continue to be tolerant, political gridlock makes it impossible. Expansionary monetary policy is at the end of its rope in the US and Japan. The UK could cut the official policy rate by 50 bps and the ECB by 125 bps, and then they too are restricted to quantitative easing (QE), which I consider to be ineffective.
via Buiter: no politically feasible route to sustained growth for many years to come | Credit Writedowns.
Just as the United States was not the only country posting a large current account deficit, so too it was not the only country that experienced asset price booms. Figure 2 shows that countries with large current account deficits in 2006 also tended to have larger house price increases. Of course, there are exceptions. For example, China has experienced rapid house price appreciation despite its enormous current account surplus. But, in general, house price appreciation and current account deficits appear to have been positively associated across many countries.
via FRBSF Economic Letter: Asset Price Booms and Current Account Deficits (2011-37, 12/5/2011).
Colin Twiggs: ~ There appears to be a general rule that large current account deficits lead to asset price booms. But to prove the rule researchers need to address why Japan experienced a massive asset price boom in the 1980s, and why China experienced a similar boom over the last decade, when both were running current account surpluses.
The FT is reporting today that the new fiscal rules for the EU “include a commitment not to force private sector bondholders to take losses on any future eurozone bail-outs”……The immediate result of this plan is that everybody will rush into the highest-yielding bonds in Europe, which is exactly what seems to have happened today……In order for markets to work, lenders need to suffer when they make bad lending decisions. If the Europeans didn’t learn from Ireland, couldn’t they at least learn from the Fed’s much-criticized decision to pay off all AIG creditors at 100 cents on the dollar? Blanket guarantees at par are pretty much always a really bad idea — and this one, if it comes to pass, will be the biggest one yet.
via The euro zone’s terrible mistake | Felix Salmon.
Colin Twiggs: ~ More evidence of moral hazard: giving bond-holders an effective put against the EU. Perhaps a partial guarantee (e.g. 90 percent) would be more effective in containing moral hazard as the bond-holder still has some skin in the game.
