Category: Countries & Regions

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Enough to make Gazputin grin

  • Chinese stocks drift lower
  • Crude oil rising
  • Other commodities weak

China’s Shanghai Composite Index continues to drift lower on the long-term, monthly chart.

Shanghai Composite Index

Apart from crude oil, commodity prices have fared little better. But crude plays such a dominant role in most commodity indices that they appear more buoyant. Dow Jones-UBS Commodity Index rallied to 140 before retracing for another test of primary support. Oscillation of 13-week Twiggs Momentum around zero, however, does not suggest a significant trend.

Dow Jones UBS Commodities Index

Crude oil is doing a lot better, heading for another test of $110/barrel on the back of supply threats from geo-political tensions. The ascending triangle is very large, but breakout would suggest a long-term target of the 2008 high at $145*.

Brent Crude and Nymex Crude

* Target calculation: 110 + ( 110 – 75 ) = 145

…Enough to make even Gazputin grin.

Vladimir Putin

Read more at Bloomberg, June 2013: Gazprom’s Demise Could Topple Putin

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Gold rallies as inflation expectations rise

Overview:

  • Treasury yields are recovering
  • Inflation expectations rise
  • The Dollar weakens
  • Gold rallies

Interest Rates and the Dollar

The yield on ten-year Treasury Notes found support at 2.50 percent. Recovery above 2.65 would suggest the correction is over, offering a medium-term target of 2.80 and long-term of 3.00 percent. 13-Week Twiggs Momentum below zero continues to indicate weakness. Reversal below 2.40 would signal a decline to 2.00 percent* — confirmed if yield follows through below 2.40 percent.

10-Year Treasury Yields

* Target calculation: 2.50 – ( 3.00 – 2.50 ) = 2.00

Long-term inflation expectations, indicated by 10-Year Treasury Yields minus 10-Year Inflation-Indexed (TIPS) Yields below, turned upward after 12-month CPI jumped to 1.8 percent in May, but are still range-bound between 2.0 and 2.50 percent.

10-Year Treasury Yields minus 10-Year Inflation Indexed (TIPS) Yields

The Dollar Index continues to head for primary support at 79.00 after retreating below 80.50. Respect of zero by 13-week Twiggs Momentum warns of continuation of the primary down-trend. Recovery above 80.50 is unlikely at present, but would suggest an advance to 81.50.

Dollar Index

Gold

Gold is testing medium-term resistance at $1325/$1330. Breakout would signal a test of $1400. Recovery of 13-week Twiggs Momentum above zero hints at a primary up-trend; breakout above $1400 would confirm. Retreat below $1280 is unlikely, but would warn of the opposite; confirmed if support at $1240 is breached.

Spot Gold

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America’s Ukraine-Policy Disaster | The National Interest

From James W. Carden:

….A second unintended consequence of our involvement with Ukraine is the emergence of Russian hypernationalism. Little attention seems to be given to the effects that our facilitating an anti-Russian regime in Kiev has had on the political landscape in Russia; Russians now, more so than at any other point in the last quarter century, are under the spell of one man. According to the widely respected Levada Center, Vladimir Putin’s approval ratings stand at 80 percent. While respected analysts like the Carnegie Endowment’s Lilia Shevtsova seem to believe that this level of support is unsustainable, the numbers may point to a new and troubling phenomenon: that a rather prosaic Russian nationalism is in the process of transmogrifying into Russian hypernationalism. If this is so, a war in East-Central Europe becomes all the more likely, because as the University of Chicago’s John J. Mearsheimer has noted, “hypernationalism …is the belief that other nations are not just inferior, but dangerous as well, and must be dealt with harshly, if not brutally…[it] creates powerful incentives to use violence to eliminate the threat.”

Read more at America's Ukraine-Policy Disaster | The National Interest.

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Full Employment and the Path to Shared Prosperity | Dissent

Great summary of the current political gridlock by Dean Baker and Jared Bernstein:

There are many policies that can reduce inequality, but there is none as straightforward conceptually and as difficult politically as full employment. The basic point is simple: at low rates of unemployment, the demand for labor allows workers at the middle and bottom of the wage distribution to achieve gains in hourly wages, annual hours of work, and thus income.

Levels of unemployment are not the gift or curse of the gods; they are the result of conscious economic policy. The decision to tolerate high rates of unemployment is a choice. It is one that has enormous implications not just for the millions of people who are needlessly unemployed or underemployed but also for tens of millions of workers in the bottom half of the wage distribution whose bargaining power is undermined by high unemployment.

It is pretty obvious that low unemployment would enhance wage growth amongst middle- and low-income workers. But the policies to create low unemployment are not as clear:

  • Raising inflation to lower real interest rates would not get strong support in many quarters. It would seem that you are manipulating market signals to dupe business investors to act in a fashion that may not be in their long-term best interest.
  • Infrastructure spending is the key to a sound recovery, but beware of raising public debt to fund anything other than productive assets that can generate a market-related return (to service the debt).
  • The trade deficit is a big part of any solution. We need to penalize currency manipulators like China (Japan before them) for buying US Treasurys to suppress their exchange rate and undermine US manufacturers.
  • Job sharing is not a long-term solution, but it does enable unemployed workers to retain skills that would otherwise be lost.

    • Overall, an excellent summary of what needs to be done. But it omits one vital piece of the puzzle. How do we get politicians and interest groups to act in the best interest of the country rather than their own?

    Read more at Full Employment and the Path to Shared Prosperity | Dissent Magazine.

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Ukraine should sell its gas pipeline to stabilize the region

From OilPrice.com

Gas supply, and the threat to that supply for Europe, is what has forced Russia to move aggressively on multiple fronts to defeat Ukraine in its efforts to modernize and westernize its economy, its future, and its way of life.

So, how to start the liberalization process? Ukraine has argued that its gas transportation system is a strategic asset. Business-minded people take issue with this interpretation, which ignores the commercial potential of the pipeline system. Now that we have come full circle in a long-brewing Ukraine-Russia gas war, perhaps the pipeline should be considered “strategic” — if not in the way the Ukrainian authorities have long understood. The pipeline system, worth $20 to $30 billion, can indeed play a strategic and tactical role in resolving Ukraine’s crisis with Russia, but only if it’s sold off.

Ukraine should sell 50 to 75 percent of it for cash to a consortium involving the EU, U.S. and Russia and operated by a U.S. business enterprise, preferably based in Houston. This can only happen if Russia agrees to remove troops and other proxies in eastern Ukraine and then works with Ukraine to secure the border and cease all low-intensity conflict efforts, including on the ground, and in cyberspace and the trade arena….

Read more at EconoMonitor : EconoMonitor » 5 Things Ukraine Must Do to Become Energy Independent.

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EconoMonitor » China, Not Piketty, Explains ‘Confused Signals’ in U.S. Asset Prices

From Benn Steil & Dinah Walker:

As for bond prices, China’s central bank holds the key.After more than three years of steady appreciation, the RMB has declined over 3% this year – erasing the past year’s rise. Driven by the Chinese government’s desire to re-juice failing economic growth, RMB depreciation has naturally been accompanied by an increase in China’s foreign exchange reserves.China usually allocates about 40 percent of its foreign exchange reserves to Treasuries; so far this year, however, its official holdings of Treasuries have actually declined. What explains this? Given that China comes under pressure from the U.S. Treasury and Congress whenever it appears to be pushing down its currency, China is almost certainly disguising its Treasury purchases by holding them in Belgium.

Read more at EconoMonitor : EconoMonitor » China, Not Piketty, Explains ‘Confused Signals’ in U.S. Asset Prices.

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Explaining Richard Koo to Paul Krugman | SNBCHF.com

George Dorgan writes:

….Prof. Steve Keen’s and Richard Koo’s recipe is to increase public debt, when the private sector is de-leveraging and to reduce public debt when the private sector is leveraging. According to Keen, the Americans are currently doing the complete opposite of what they should do. They should continue reducing private liabilities, but they should increase public spending.

The Fed wants the average American to spend, even deficit spending, while the state is doing austerity. According to Keen, the current increase of private US debt could lead to a new recession.

Read more at Explaining Richard Koo to Paul Krugman, to Austrian Economists and the SNB #Balance Sheet Recession.

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Will Inflation Remain Low? | FRBSF

From Yifan Cao and Adam Shapiro at the Federal Reserve Bank of San Francisco:

The well-known Phillips curve suggests that future inflation depends on current and past inflation and a measure of economic slack or resource utilization. Using the unemployment gap to measure slack, a simple Phillips curve currently predicts that inflation will remain quite low through 2015. Two variations of the model, which impose a higher anchor for inflation expectations or focus only on a short-term unemployment gap, still predict that inflation will remain low, albeit higher than implied by the basic model.

Read more at Federal Reserve Bank San Francisco | Will Inflation Remain Low?.

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Shanghai rally

Dow Jones Shanghai Index rallied Monday, headed for another test of resistance at 270/272. Momentum is rising, but only recovery above 282/284 (with TMO above zero) would signal a trend change. Further consolidation is more likely, ranging between 258 and 284. Downward breakout, unlikely at present, would warn of a decline to 240*.

Dow Jones Shanghai Index

* Target calculation: 260 – ( 280 – 260 ) = 240

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