Germany’s DAX broke out of its narrow line (or consolidation) between 10200 and 10800, signaling a primary advance with a target of 11500* and confirming a bull market.
* Target calculation: 10500 + ( 10500 – 9500 ) = 11500
Are stocks overpriced?
Some good discussion on our forum regarding current high stock valuations, based more on hopes than on earnings.
This chart of Price-Earnings ratios highlights the problem. PEs for both the MSCI World Index (ex-Australia) and the ASX 200 are close to historic highs (after the Dotcom bubble).
Strong earnings growth would soon fix this but there is little sign of that at present.
Wider trade gap adds to economy’s worries
From Jens Meyer and Patrick Commins:
A surprise blow-out in the October trade deficit has raised questions about the predicted rebound in economic growth, following the first contraction in GDP in five years.
Instead of shrinking as predicted, Australia’s trade gap widened 20 per cent to $1.54 billion as growth in imports outpaced exports….
Paul Dales from Capital Economics said the October trade number was worrying as it implied net exports – a key GDP component – might be a big drag on economic growth in the fourth quarter, as volumes mattered for real GDP growth.
“This could all change when the November and December trade data are released. But at the moment, other parts of the economy will have to be much stronger to prevent another fall in GDP,” he said, adding that while that was probable, he was nonetheless now more worried about a possible recession.
On its own, the trade deficit is unlikely to tilt the economy into recession but there is a worrying contraction in business investment, outside of the expected mining slow-down, and in wages growth.
Australia: Say goodbye to growth
Business investment in Australia continues its sharp descent since the end of the mining boom, falling below 14% of GDP for the first time since the Dotcom crash.
Source: RBA Chart Pack
Apart from the expected “cliff” in Engineering, investment in Machinery and Equipment has fallen to record lows.
Source: RBA Chart Pack
Without investment, growth is likely to contract. The impact on Australian wages is an ominous warning.
Source: RBA Chart Pack
First Impressions: Australian Q3 GDP
From Andrew Hanlan at Westpac:
The Australian economy contracted in the September quarter, with a sharper fall than anticipated.Q3 GDP was -0.5%, after a +0.6%. Annual growth slowed to 1.8% from 3.1%….
Trump the biggest positive and negative risk for growth, survey finds
From Zac Crellin:
The policies of a Trump administration are both the biggest downside and upside risks to the global economy, an international survey of companies by Oxford Economics has found.
While 38 per cent of respondent companies were hopeful for US growth to surge thanks to President-elect Donald Trump’s fiscal stimulus program, 27 per cent feared Mr Trump would instigate a trade war between the US and China….
Source: Trump the biggest positive and negative risk for growth, survey finds
ASX rally falters
The ASX 200 rally stalled at 5500. Declining 21-day Twiggs Money Flow indicates rising selling pressure. Breakout above 5500 would complete a bear trap, indicating a primary advance to 5800*. But reversal below 5400 would signal another test of primary support at 5150.
DAX retreats
Germany’s DAX is retracing to test support at 10200. The DAX has formed a narrow line (or consolidation) between 10200 and 10800 over the last quarter. Declining Twiggs Money Flow is typical during a consolidation and does not have much significance unless it crosses below zero. Breakout will signal future direction, either an advance to 11500* or a test of support at 9000.
* Target calculation: 10500 + ( 10500 – 9500 ) = 11500
Footsie selling pressure
The Footsie (FTSE 100) is again testing support at 6700. Declining Twiggs Money Flow warns of selling pressure. Breach of 6700 is likely and would warn of a correction to 6500.
Brexit negotiators identify UK’s trump cards
From Alex Barker:
Some British ministers reckon that Europe will eventually realise there are negative consequences for all sides from a hard, sharp Brexit. One is the competitive threat posed by a UK unbound. Dubbed the “Singapore model”, this is a scenario of British tax and regulatory “dumping” that European capitals fear. Britain is too big, too close and too similar an economy to not worry about being undercut…..
The second is the City of London. This remains Europe’s main financial hub and a hard exit could raise costs for corporate Europe and inflame weaknesses such as Italian banks.
David Davis, Brexit minister, has noted that more EU companies request a financial-services passport to operate in the UK than vice versa….