“Australia is a leveraged time bomb waiting to blow,” Albert Edwards, Société Générale’s London-based global strategist, said. “It is not just a CDO, but a CDO squared. All we have in Australia is, at its simplest, a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China.”
From William Pesek at Rudd? Gillard? Australians have bigger problems – Columnists | IOL Business | IOL.co.za.
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.
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.
Japan’s Nikkei 225 Index respected support at 12500 and its long-term rising trendline, but another test is likely in the week ahead. Follow-through above 13500 would indicate the correction is over, suggesting a re-test of resistance at 16000. Breach of 12500, however, is more likely, with bearish divergence on 13-week Twiggs Money Flow warning of a reversal.
Shanghai Composite Index is falling sharply. So far the down-trend has been gradual, with the PBOC looking to manufacture a soft landing. But 13-week Twiggs Money Flow crossing below zero warns of rising selling pressure. Breach of support at 1950 would offer a target of 1600*.
* Target calculation: 2000 – ( 2400 – 2000 ) = 1600
India’s Sensex breached its rising trendline, warning that the primary up-trend is weakening. Failure of support at 18000 would signal a primary down-trend. Declining 13-week Twiggs Money Flow indicates trend reversal is likely. Recovery above 19000 is unlikely, but would suggest a fresh primary advance.
Apart from Japan, the outlook for Asia is bearish.
The ASX 200 is headed for a test of support at 4400, bearish divergence on 13-week Twiggs Money Flow having warned of a reversal. Failure of support at 4400 would re-test the 2011 lows, while respect would be bullish — suggesting another attempt at 5000.
The Aussie Dollar fell to below $0.93 within hours of the latest FOMC announcement from the Fed. Breach of support indicates another decline, with a target of $0.90*.
* Target calculation: 0.9330 – ( 0.9660 – 0.9330 ) = 0.9000
The monthly chart shows the Aussie has broken long-term support around $0.95, signaling a decline to $0.80*. Declining 13-week Twiggs Momentum below zero confirms a primary down-trend.
* Target calculation: 0.95 – ( 1.10 – 0.95 ) = 0.80
It is not just a stronger greenback, the Aussie is also falling against the crosses. Canada’s Loonie broke resistance at parity to the Australian Dollar, signaling a primary up-trend.
The S&P 500 is testing resistance at 1650, but declining 21-day Twiggs Money Flow warns of continued selling pressure. Breakout would signal an advance to the upper trend channel, around 1700. Reversal below 1600, however, remains likely and would indicate a correction to 1500.
China’s Shanghai Composite Index broke primary support at 2170 on Thursday. Follow-through below 2150 would signal a decline to the 2012 low of 1950*.
* Target calculation: 2150 – ( 2350 – 2150 ) = 1950
The ASX 200 is retracing to test its new resistance level at 4900. Respect would confirm the primary down-trend — as would a peak below zero on 21-day Twiggs Money Flow.
The ASX Small Ordinaries Index, reflecting retail investor interest in the market, continues its primary down-trend. Breach of the 2012 low at 2040 warns of a decline to 1700*.
* Target calculation: 2050 – ( 2400 – 2050 ) = 1700
The Aussie Dollar rallied to $0.955 on the 2-hour chart before encountering selling pressure. Expect a test of the 2011 low at $0.94. Breach would indicate another decline. The next target is $0.90*, with a long-term target of $0.80*. Breakout above $0.955 is unlikely, but would re-test resistance at $0.98.
* Target calculations: 0.94 – ( 0.98 – 0.94 ) = 0.90 and 0.95 – ( 1.10 – 0.95 ) = 0.80
Canada’s Loonie, however, respected support at $0.96, heading for another test of resistance at $0.99 or parity. 13-Week Twiggs Momentum below zero suggests continuation of the down-trend. Respect of resistance would indicate another decline, with a target of $0.94*.
* Target calculation: 0.97 – ( 1.00 – 0.97 ) = 0.94
The euro broke resistance at $1.32 and is headed for $1.37*. Breakout is some way off, but would offer a target of $1.47*.
* Target calculation: 1.37 + ( 1.37 – 1.27 ) = 1.47
Pound Sterling broke resistance at $1.56, signaling an advance to $1.63*. Recovery of 13-week Twiggs Momentum above zero would strengthen the bull signal.
* Target calculation: 1.56 + ( 1.56 – 1.50 ) = 1.62
The greenback continues a strong correction against the Yen, but this is a secondary movement and the primary up-trend is unaltered. A 13-week Twiggs Momentum trough above zero would strengthen the signal. Recovery above resistance at ¥100 would signal a fresh advance with a target of ¥113*. Long-term target for the advance is the 2007 high at ¥125*.
* Target calculations: (a) 104 + ( 104 – 95 ) = 113; (b) 100 + ( 100 – 75 ) = 125
Germany’s DAX respected support at 8000 on its recent retracement. Follow-through above 8500 would confirm a fresh primary advance. Bearish divergence on 13-week Twiggs Money Flow, however, warns of strong selling pressure. Retreat below 8000 would test the rising trendline around 7500.
The FTSE 100 also encountered resistance at its 2007 high, bearish divergence on 13-week Twiggs Money Flow signaling selling pressure. Expect a test of support at 6000. Recovery above 6750 is unlikely but would signal a fresh primary advance.
The Nikkei 225 found support at 12500. Reversal below this level would warn of a decline to 10000. Bearish divergence on 13-week Twiggs Money Flow warns of strong selling pressure. I was interested to read that George Soros was buying Japanese stocks. To me it seems premature.
India’s Sensex is headed for a test of medium-term support at 19000. Breach would test primary support at 18000. Respect would indicate another advance, but bearish divergence on 13-week Twiggs Money Flow continues to warn of reversal to a primary down-trend. Failure of primary support at 18000 would confirm.
Singapore’s Straits Times Index reversed below its new support level at 3300, warning of a bull trap. Follow-through below last week’s low would indicate a test of the long-term trendline around 3000.
The Shanghai Composite Index retreated sharply last week and is headed for another test of support at 2150. Breach would signal a fall to 1950. Declining 13-week Twiggs Money Flow warns of selling pressure. A weakening Shanghai Index is bearish for Australian resources stocks.
The ASX 200 found support at 4750, while bearish divergence on 13-week Twiggs Money Flow warns of strong selling pressure. The falling Aussie Dollar is forcing a retreat of offshore investors from the market, but the eventual boost to export earnings is likely to present a buying opportunity later. Expect a weak rally followed by decline to 4500.
Johan Norberg explains why Sweden, with the lowest poverty rate (1.2%) in Europe, still experiences riots amongst disaffected, largely immigrant youth in parts of Stockholm:
……there is serious inequality in Sweden, but the divide is not so much between the rich and the poor as between those with jobs and those without. And frequently this is an ethnic divide. As the author Fredrik Segerfeldt points out in a new study, Sweden has the largest employment gap between natives and foreign-born of all the rich countries where data is available. Only 6.4 per cent of native Swedes are unemployed, but almost 16 per cent of the immigrants are…….. In Husby, where the riots started, 38 per cent of those under 26 neither study nor work.
So what’s to blame? The aspect of the Swedish social model that the government has not dared to touch: strong employment protection. By law, the last person to be hired must be the first person to be sacked. And if you employ someone longer than six months, the contract is automatically made permanent. A system intended to protect the workers has condemned the young to a succession of short-term contracts. Sweden’s high de facto minimum wage — around 70 per cent of the average wage — renders unemployed those whose skills are worth less than that. Sweden has the fewest low-wage, entry-level jobs in Europe. Just 2.5 per cent of Swedish jobs are on this level, compared to a European average of 17 per cent.
This highlights the paradox of strong labor laws intended to protect employment. They discourage permanent employment and create a two-tier society: those with permanent jobs and “permanent” casual-workers. High minimum wages, again do not guarantee that those with low skill-levels earn a decent wage. It guarantees that they will be unemployed and dependent on social welfare. Australia should take note.
Read more at Why Sweden Has Riots | Cato Institute.
