….every asset class that was designed to benefit from the Euro Summit (rates, sovereign debt, & Italian banks for example) has given up its gains (France CDS widening significantly and EFSF deteriorating also) and the most shocked and still likely scarred (psychologically) equity and credit indices have room to drop here to catch up with that reality – whether the recession on/off switch is triggered or the ‘must-buy-to-avoid-career-risk’ trade is on.
Why the RBA should cut rates – macrobusiness.com.au
Nominal house prices are falling. Not collapsing, certainly. But falling very consistently, roughly 6% peak to trough. 8.5% in real terms. This has had a number of well documented effects including high savings rates, historically conservative levels of retail sales and stalled services sector investment.
…..Now, in August, the latest month for which we have data, coal and iron ore earned Australia $12 billion in export income. Assuming the price falls we have seen get no worse (or better), by the time new prices filter through the various contract systems, those same commodities will earn us roughly $9 billion in January next year (all things being equal with the currency).
via Why the RBA should cut rates – macrobusiness.com.au | macrobusiness.com.au.
Japan and South Korea
Dow Jones Japan Index weakened Monday, warning of another test of primary support at 48.
Dow Jones South Korea Index had a stronger breakout, but is also now retracing. Respect of support would confirm the up-trend, while reversal below 400 would signal weakness.
Hong Kong and China
HongKong’s Hang Seng Index broke its secondary descending trendline at 19000, indicating a test of the primary trendline at 21000/22000.
* Target calculation: 19 + ( 19 – 16 ) = 22
The Shanghai Composite Index recovered above support at 2350. Breakout above its secondary trendline would also test the primary trendline around 2900.
Dow Jones HongKong Index shows retracement to test short-term support on Monday. Respect of the rising trendline would signal trend strength, while failure of support at 360 would signal another decline.
Europe’s Dying Bank Model – Gene Frieda – Project Syndicate
In general, the eurozone has outsized banks (assets equivalent to 325% of GDP) that are highly leveraged (the 15 largest banks’ leverage is 28.9 times their equity capital). They are also dependent on large quantities of wholesale debt – totaling €4.9 trillion (27% of total eurozone loans), with €660 billion maturing in the next two years – to fund low-yielding assets. According to Barclays Capital, the 15 largest banks increased their returns on equity by 58% between 1998 and 2007, with 90% of the gain coming from higher leverage. Returns have since collapsed.
This model’s viability depends on large amounts of cheap leverage, supported by implicit government backing.
via Europe’s Dying Bank Model – Gene Frieda – Project Syndicate.
Australia retraces to find support
The ASX 200 broke out above its descending trendline — warning that the down-trend was ending — but ran into selling pressure. Bearish divergence on 21-day Twiggs Money Flow confirms the tall shadow on Friday’s candle. Respect of support at 4100 would suggest a primary up-trend, while failure would re-test primary support at 3850.
* Target calculation: 4300 + ( 4300 – 3900 ) = 4700
Support levels are clearer on the weekly chart.
Canada TSX 60
Canada’s TSX 60 index is headed for a test of resistance at 720/730 on the weekly chart. Expect a retracement. Respect of the trendline would warn of another test of primary support. Breakout above the descending trendline would signal that the primary down-trend has weakened and a bottom is forming. A 13-week Twiggs Money Flow trough that respects the zero line would indicate strong buying pressure.
* Target calculation: 720 + ( 720 – 640 ) = 800
* Target calculation: 720 + ( 720 – 640 ) = 800
Europe rebounds
The FTSE 100 index is headed for a test of its 2011 high at 6000/6100. Rising 13-week Twiggs Money Flow signals strong buying pressure. Expect retracement to test support at 5400. Respect would confirm a primary up-trend; failure would re-test support at 4800.
* Target calculation: 5400 + ( 5400 – 4800 ) = 6000
Germany’s DAX is testing resistance at 6500. Retracement would test support at 5600. A 63-day Twiggs Momentum peak that respects the zero line would warn that the bear market will continue.
* Target calculation: 5700 + ( 5700 – 5000 ) = 6400
Italy is the latest canary in the coal mine. The FTSE MIB index rallied to test its secondary descending trendline at 17000. Respect would warn of another test of primary support at 13000, while breakout would offer a target of 19000*. The primary trend remains downward despite 13-week Twiggs Money Flow having crossed above zero.
* Target calculation: 17 + ( 17 – 15 ) = 19
Now for the correction
Several weeks ago, when asked what it would take to reverse the bear market, I replied that it would take 3 strong blue candles on the weekly chart followed by a correction — of at least two red candles — that respects the earlier low. We have had three strong blue candles. Now for the correction.
On the S&P 500 expect retracement to test support at 1200 or 1250. Respect of 1250 would signal a strong up-trend, while failure of support at 1200 would warn of another test of primary support at 1100. A trough on 13-week Twiggs Money Flow that respects the zero line would also indicate strong buying pressure.
* Target calculation: 1225 + ( 1225 – 1100 ) = 1350
Dow Jones Industrial Average weekly chart displays a similar picture. Expect retracement to test support at 11500. A peak on 63-day Twiggs Momentum that respects the zero line would be bearish — warning of continuation of the primary down-trend.
* Target calculation: 11500 + ( 11500 – 10500 ) = 12500
The Nasdaq 100 is testing resistance at 2400 — close to the 2011 high. Breakout would signal a primary advance to 2800*, while respect would warn of another test of primary support at 2000. Bullish divergence on 13-week Twiggs Money Flow has warned of a reversal for several weeks.
* Target calculation: 2400 + ( 2400 – 2000 ) = 2800
After China, Fund Chief Goes to Japan – WSJ.com
On Friday, Chinese and European officials sought to play down expectations about when and how China may deploy its vast financial resources to help bail out indebted countries in Europe.
A Chinese Vice Finance Minister said China must first see the details of a new European bailout fund before making any commitments. “We of course must wait until its structure is extremely clear,” Zhu Guangyao told a press briefing. “And moreover, this investment must be decided on after serious, technical discussions.”
Mr. Regling told reporters he doesn’t expect “any precise outcome” from his visit to China and said “it’s too early to say what kind of amounts might be envisioned.”
…..Mr. Regling dismissed suggestions that European leaders will be forced to offer concessions to China in return for investment. “I am not here to discuss concessions,” he said, noting that China already buys EFSF bonds and gets no special considerations.