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Ambrose Evans-Pritchard reports:
The region’s core inflation rate – which strips out food and energy – fell to 1pc in March. This is far below expectations and leaves monetary union with a diminishing safety buffer. “The eurozone is tracking the experience in Japan in mid-1990s. There is a very high risk of a slide into deflation,” said Lars Christensen, a monetary theorist at Danske Bank.
Read more at Eurozone risks Japan-style trap as deflation grinds closer – Telegraph.
A welcome development reported by LAURA STEVENS , DAVID ENRICH and ULRIKE DAUER at the Wall Street Journal:
FRANKFURT–Deutsche Bank AG [DBK.XE] said Monday it will raise €2.8 billion ($3.65 billion) in fresh capital in a dramatic about-face for the bank, which has repeatedly said it won’t turn to shareholders for help boosting its capital cushion.
The bank, Europe’s second-largest by assets, has long faced doubts from investors and analysts about whether it has enough capital to absorb potential future losses and to meet increasingly stringent regulatory requirements……
Deutsche Bank has long been considered thinly capitalized but have always countered with the argument that the leverage is justified by the quality of the assets on their balance sheet. Low risk-weightings provided a false sense of security, with Greek and other PIIGS government bonds rated as zero-risk in the past, encouraging banks to leverage up on precisely the wrong kind of assets. It is time for risk weightings to be removed from bank capital ratios. The bipartisan bill sponsored by US senators Sherrod Brown and David Vitter is a step in the right direction.
Read more at Deutsche Bank Plans Capital Boost – WSJ.com.
Singapore’s Straits Times Index broke long-term resistance at 3300, signaling an advance to the 2007 high of 3900*. Troughs above zero on 13-week Twiggs Momentum strengthen the signal.
* Target calculation: 3300 + ( 3300 – 2700 ) = 3900
India’s Sensex followed through above resistance at 19000. Breach of the descending trendline would indicate a primary advance to 22000*. 13-week Twiggs Money Flow below zero, however, signals selling pressure and reversal below 19000 would warn of another test of primary support at 18000.
* Target calculation: 20000 + ( 20000 – 18000 ) = 22000
China’s Shanghai Composite is again testing medium-term support at 2150. Failure of support would warn of a decline to test primary support at 1950/2000. Reversal above 2250, however, would penetrate the descending trendline, indicating another test of 2500.
Japan’s Nikkei 225 continues to climb, with a steeply rising 13-week Twiggs Money Flow indicating strong buying pressure. Target for the advance is 15000*.
* Target calculation: 11500 + ( 11500 – 8000 ) = 15000
The ASX 200 is testing resistance at 5150. Breakout would offer a target of 5400*, but bearish divergence on 13-week Twiggs Money Flow warns of selling pressure. Failure of support at 4900 would signal a reversal.
* Target calculation: 5150 + ( 5150 – 4900 ) = 5400
Germany’s DAX found support at 7500 and is again testing long-term resistance at 8000 (shown on the quarterly chart below). 13-Week Twiggs Momentum and Twiggs Money Flow both display bearish divergences, warning of selling pressure. Reversal below 7500 remains likely and would signal a correction to test the rising trendline.
* Target calculation: 7500 – ( 8000 – 7500 ) = 7000
Italy’s MIB index found support at 15000. Follow-through above 17000 would indicate a primary advance and penetration of resistance at 18000 would confirm the primary up-trend signaled earlier by bullish divergence on 13-week Twiggs Momentum.
* Target calculation: 18 + ( 18 – 15 ) = 21
The FTSE 100 is testing resistance at 6500. Rising 13-week Twiggs Money Flow and Twiggs Momentum both suggest that breakout is likely — which would signal an advance to 7000.
* Target calculation: 6500 + ( 6500 – 6000 ) = 7000
The TSX Composite correction found support at 12000. Expect a rally to test resistance at 12500, but penetration of the rising trendline indicates weakness and breach of support at 12000 would be a strong bear signal. Bearish divergence on 13-week Twiggs Money Flow warned of a correction; a fall below zero would suggest a (primary trend) reversal.
10-Year Treasury yields broke through support at 1.70%. Prior to 2012, the 1945 low of 1.70% was the lowest level in the 200 year history of the US Treasury. Expect a test of primary support at 1.40%.
Falling Treasury yields generally indicate a flight from stocks to the safety of bonds. The S&P 500, however, is consolidating below resistance at 1600. Breakout would suggest an advance to 1650, while reversal below 1540 would indicate a correction to the rising trendline at 1475. Recent weakness on 13-week Twiggs Money Flow favors a correction, but oscillation above zero indicates a healthy primary up-trend. A June quarter-end below 1500 would present a strong long-term bear signal.
* Target calculation: 1475 + ( 1475 – 1350 ) = 1600
The Nasdaq 100 index is testing resistance at 2900. Breakout would offer a target of 3400*, but bearish divergence on 13-week Twiggs Money Flow favors a break of 2800 and test of the rising trendline at 2700.
* Target calculation: 2900 + ( 2900 – 2500 ) = 3400
Gold rallied to test resistance at $1500/ounce. Breakout would suggest a bear trap and a rally to $1600, but respect of resistance is likely and would signal another test of support at $1330/1350. A gold bear market indicates falling inflation expectations, but that could also translate into lower growth in earnings and higher Price Earnings ratios.
Structural flaws in the US economy have not been addressed and uncertainty remains high, despite low values reflected on the VIX.
Michael McLaren from 2GB speaks with Benjamin Herscovitch, Policy Analyst at The Centre for Independent Studies, who discusses the dangerous growth of the welfare state in Australia.
The CIS has launched a TARGET 30 campaign to restrict government spending — currently 35 percent of GDP — to 30 percent.
This abstract from a 2010 paper by Martin Hellwig sums up the debate about overhauling the financial system:
Whereas the Basel Committee on Banking Supervision seems to go for marginal changes here and there, the paper calls for a thorough overhaul, moving away from risk calibration and raising capital requirements very substantially. The argument is based on the observation that the current system of risk-calibrated capital requirements, in particular under the model-based approach, played a key role in allowing banks to be undercapitalized prior to the crisis, with strong systemic effects for deleveraging multipliers and for the functioning of interbank markets. The argument is also based on the observation that the current system has no theoretical foundation, its objectives are ill-specified, and its effects have not been thought through, either for the individual bank or for the system as a whole. Objections to substantial increases in capital requirements rest on arguments that run counter to economic logic or are themselves evidence of moral hazard and a need for regulation.
The bipartisan bill, Terminating Bailouts for Taxpayer Fairness Act, sponsored by senators Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, is a courageous attempt to address the undercapitalization that led to the global financial crisis. Abruptly raising bank capital requirements would lead to a credit contraction if introduced in isolation, but the Fed is quite capable of adjusting monetary policy to offset this and a suitable phase-in period would give banks time to adjust. What is important is that we get to the point where banks are properly capitalized to deal with any future instability.
Read the full paper at Capital Regulation after the Crisis: Business as Usual? | Martin Hellwig, July 2010.
Richard Koo is the first speaker on this video
Click [ ] to view full screen.
This is a show-down between Wall Street and the voting public. Gretchen Morgenson at NY Times writes:
THERE’S a lot to like, if you’re a taxpayer, in the new bipartisan bill from two concerned senators hoping to end the peril of big bank bailouts. But if you’re a large and powerful financial institution that’s too big to fail, you won’t like this bill one bit.
The legislation, called the Terminating Bailouts for Taxpayer Fairness Act, emerged last Wednesday; its co-sponsors are Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican. It is a smart, simple and tough piece of work that would protect taxpayers from costly rescues in the future.
This means that the bill will come under fierce attack from the big banks that almost wrecked our economy and stand to lose the most if it becomes law.
For starters, the bill would create an entirely new, transparent and ungameable set of capital rules for the nation’s banks — in other words, a meaningful rainy-day fund. Enormous institutions, like JPMorgan Chase and Citibank, would have to hold common stockholder equity of at least 15 percent of their consolidated assets to protect against large losses. That’s almost double the 8 percent of risk-weighted assets required under the capital rules established by Basel III, the latest version of the byzantine international system created by regulators and central bankers.
This change, by itself, would eliminate a raft of problems posed by the risk-weighted Basel approach……
The outcome is far from clear. The financial muscle of Wall Street can buy a lot of influence on the Hill. But my guess is that they are too smart to incense voters by meeting the bill head-on. Instead they will attempt to delay with amendments and eventually turn it into an unwieldy 1000-page unenforcable monstrosity that no one understands. Much as they did with Dodd-Frank.
If they win, the country as a whole will suffer. Maybe not today, but in the inevitable next financial crisis if this bill does not pass.
Read more at Two Senators Try to Slam the Door on Bank Bailouts – NYTimes.com.