The Aussie dollar recovered above parity, breach of the declining trendline indicating that the correction is over. Breakout of the CRB Commodities Index above 325 would be a bullish sign, suggesting another test of $1.08 against the greenback. Breakout above $1.08 remains unlikely, but would offer a long-term target of 1.20*.
* Target calculation: 1.08 + ( 1.08 – 0.96 ) = 1.20
Dow Jones Industrial Average rallied strongly in response to news of a European rescue by major central banks. Sharp rallies are typical of shorts covering in a bear market. Strong volume indicates resistance — if you look back over the last few months (ignore triple-witching at [W]) volume above 200 million normally precedes a reversal. Expect selling pressure at 12000 to 12300, leading to a reversal. Breakout above 12300 is unlikely but would be a strong bull signal, indicating that buyers have overcome resistance.
David Weidner, Marketwatch: “Give me a swap line on currency and I will bet the farm….I am shocked that the market is rallying this much today on this news [European markets up about 10pc in dollar terms].”
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David Weidner interviewed by Evan Newmark of Mean Street.
Hillary Clinton has urged developing nations to be “smart shoppers” when accepting foreign aid from China and other new donors, as she became the first US secretary of state in more than 50 years to visit Burma on Wednesday.
In Rangoon, Mrs Clinton warned that powerful emerging economies may be more interested in exploiting natural resources than promoting real development.
“Be wary of donors who are more interested in extracting your resources than in building your capacity,” she said. “Some funding might help fill short-term budget gaps, but we’ve seen time and again that these quick fixes won’t produce self-sustaining results.”
Need a reason to explain the massive central bank intervention from China, to Japan, Switzerland, the ECB, England and all the way to the US? Forbes may have one explanation: “It appears that a big European bank got close to failure last night. European banks, especially French banks, rely heavily on funding in the wholesale money markets. It appears that a major bank was having difficulty funding its immediate liquidity needs. The cavalry was called in and has come to the successful rescue.”
via Did A Large European Bank Almost Fail Last Night? | ZeroHedge.
HONG KONG — Faced with an economy that appears to be slowing faster than economists forecast even a month ago, the Chinese government on Wednesday unexpectedly reversed its yearlong move toward tighter monetary policy and took an important step to encourage banks to resume lending.
The central bank said that commercial banks would be allowed to keep a slightly lower percentage [0.5pc] of their deposits as reserves at the central bank. The change, which will take effect on Monday, means that commercial banks will have more money to lend, which could help to rekindle economic growth and a slumping real estate market.
via China, in Surprising Shift, Takes Steps to Spur Bank Lending – NYTimes.com.
WASHINGTON — The world’s major central banks launched a joint action to provide cheap, emergency U.S. dollar loans to banks in Europe and elsewhere, a sign of growing alarm among policy makers about stresses in Europe and in the global financial system. The Fed, ECB and other central banks took coordinated action to support the global financial system as Europe’s rolling debt crisis continues to trouble markets. The coordinated action doesn’t directly address Europe’s government-debt and budget woes. Instead, it is aimed at alleviating the impact of those troubles on global markets. Moreover, it raises the prospect of other steps by central bankers to prevent a repeat of the 2008 financial crisis.
US commercial bank loans and leases bottomed in April 2011, after shrinking more than $1 trillion in the previous two years. The annual rate-of-change has now recovered to positive territory, relieving downward pressure on asset prices, including stocks and real estate. Deleveraging has come to an end and is only likely to resume if the economy suffers further financial shocks.
You would expect the gap between savings and investment to close when net debt repayments cease, but a significant shortfall between Gross Private Savings and Domestic Investment warns of continued instability.
The Investment – Savings gap is reflected by strong, negative Net Private Investment on the chart below. If it were not for the fiscal deficit, the US would risk a significant contraction in national income.
For the benefit of those who may have missed my earlier coverage of this issue:
Debt repayment after a financial crisis/balance-sheet recession creates a gap between savings and investment that has serious implications for the economy. The resultant shortfall between spending and income risks a sharp contraction in national income. The gap may be relatively small but, like a puncture in a car tire, the impact can be huge. It only takes each of us to withhold 2% of what we earn (e.g. to repay debt) for a gap to appear between spending and income. A for example may earn $1.00 but now only pays 98 cents to B, who will pay 96.04 cents to C, who will pay 94.12 cents to D, and so on through the entire supply chain. By the time we get to L, they will only earn 80 cents where they previously earned $1.00.
The solution, as Keynes pointed out, is for government to offset the shortfall by running a fiscal deficit. The chart above shows that Treasury has been doing exactly that — spending more than they collect by way of taxes — in order to prevent a contraction. The problem is that continual deficits have two serious side-effects. The first is a loss of investor confidence as the ratio of public debt to GDP rises. The second is inflation — if private investment recovers and starts competing with government for ever-scarcer resources. By inflation I do not just mean an increase in the CPI, but also rising asset prices as experienced in the 2004 to 2008 housing bubble, when government ran a deficit while net private investment was positive.
As the chart shows, the fiscal deficit is being funded by net savings (plus a little help from China). So what would happen if we cut the deficit?
The truth lies somewhere in between. Corporate balance sheets are generally in good shape while small-to-medium business and home-owners have suffered significant impairment. And one of the major factors inhibiting investment is the uncertain political/economic environment.
Deleveraging has ended and the time has come to start cutting back the government deficit — but cautiously. Cutting the entire deficit in one hit would be more of a shock than the economy could bear, but setting out a four-year plan to cut the deficit by say 2 percent a year would do a lot to restore confidence and set the economy on a path to recovery.
The Harper Petersen Index shows a fall in container shipping rates in the last few months, reflecting a sharp decline in manufacturing exports.
Bloomberg (hat tip to macrobusiness.com.au) now reports that “the cost of hauling goods to Europe from China (its largest export market) is falling faster than rates for deliveries to the U.S. The price for shipments to Europe is down 39 percent to $511 per twenty-foot box since Aug. 31, according to figures from Clarkson Securities Ltd., a unit of the world’s largest shipbroker. That’s more than double the 18 percent slide in the cost to the U.S. West Coast, measured in 40-foot units.”
Looks like something positive is brewing in Europe, but I don’t want to jump the gun. China looks weak, US probably through its worst, Europe still faces plenty of pain even if fiscal reform and euro-bonds introduced. Game changer would be QE/asset purchases by Fed and ECB.
