UK & Europe Archives - Page 22 of 88

September 19, 2014

S&P bullish but Asia, Europe weak

Weekly highlights:

Scotland votes “No” and the Pound rallies
Treasury yields (long-term) are rising and the Dollar strengthens
Gold and crude oil fall
European stocks remain bearish
Asian stocks also remain bearish despite Hong Kong/Shanghai breakout
US stocks still reflect a bull market

Stock markets

Dow Jones Europe Index is retracing after a weak rally that reached 335. Failure of support at 320 would signal a primary down-trend. Follow-through below 315 would confirm. A 13-week Twiggs Momentum peak below zero strengthens the bear signal.

* Target calculation: 320 – ( 340 – 320 ) = 300

Dow Jones Asia Index is testing primary support at 3200 despite bullishness on the Hang Seng and Shanghai Composite. Bearish divergence on 13-week Twiggs Momentum warns of a test of 3100. Breach of 3200 would signal a primary down-trend, while follow-through below 3100 would confirm.

* Target calculation: 3100 + ( 3100 – 2800 ) = 3400

The S&P 500 recovered above 2000 to signal a fresh advance. Follow-through above 2010 confirms a target of 2100*. Reversal below 1980 is unlikely. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure.

S&P 500

* Target calculation: 2000 + ( 2000 – 1900 ) = 2100

CBOE Volatility Index (VIX) remains low, typical of a bull market.

S&P 500 VIX

The ASX 200 correction found support at 5300/5350. But 13-week Twiggs Money Flow below zero, after a long-term bearish divergence, warns of further weakness. Breach of 5300 would indicate a test of 5000. Recovery above 5550 is unlikely, but would suggest a fresh advance.

ASX 200

* Target calculation: 5650 + ( 5650 – 5350 ) = 5950

September 18, 2014

Defence With A “C”: The Russian Bear Cometh!

From Chris at Defence with a C:

Russia has spent the last decade talking about programs to upgrade its armed forces and spend more money on things like training, logistics and maintenance. The fruits of this investment, or even just the investment itself, appear to be taking a very long time to actually materialise.

This is not to say that NATO shouldn’t sleep with one eye open, or that NATO should stop investing in its collective defence. Vigilance is the first stage of preparedness after all. But to say that Russia is an imminent threat to NATO is over egging the pudding I feel….

September 16, 2014

DAX and Footsie show resilience

Germany’s DAX is retracing in a flag pattern after several weeks of healthy advance. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure. Continuation is likely and breach of resistance at 9800 would indicate another test of 10000. Reversal below 9300 is unlikely.

DAX

Dow Jones Euro Stoxx 50 retreated from its recent high of 3300. Respect of 3200, however, would suggest an advance to 3600*; confirmed if the index breaks above 3300. Respect of the zero line by 13-week Twiggs Money Flow would indicate medium-term buying pressure, while reversal below zero would be bearish.

Dow Jones Euro Stoxx 50

Long tails on the Footsie indicate support at 6800. A “no” vote in the Scottish independence referendum may precipitate another test of long-term resistance 6900, while a “yes” outcome would most likely cause a correction. But any losses are likely to be short-lived as any negotiations settle into a long, drawn-out process.

FTSE 100

* Target calculation: 7000 + ( 7000 – 6000 ) = 8000

September 12, 2014

Europe uneasy

Weekly highlights:

The Dollar is strengthening
Treasury yields (long-term) are rising
Gold and crude oil are falling
European stocks are bearish
US stocks remain bullish

The tenuous ceasefire in Eastern Ukraine appears to be holding, but Europe faces another challenge this week, with a Scottish referendum on independence. Predictions of financial mayhem in the event of a “Yes” vote are, I feel, exaggerated in an attempt to influence the outcome. The official position of the UK government is:

“If a majority of those who vote want Scotland to be independent then Scotland would become an independent country after a process of negotiations.”

The “process of negotiations” is likely to be comprehensive and would resolve most outstanding uncertainties in an orderly fashion. There has been much debate over economic issues, but it is no coincidence that the referendum is being held in the same year as the 700th anniversary of the Battle of Bannockburn, when Scots under Robert the Bruce defeated an English army led by Edward II to regain their independence.

Stock markets

Dow Jones Euro Stoxx 50 remains hesitant, retreating from resistance at 3300. Consolidation above 3200 would be a bullish sign, while breach of 3100 would threaten primary support at 3000. Another 13-week Twiggs Money Flow trough above zero would indicate buying pressure, but reversal below zero would warn of a down-trend.

* Target calculation: 3300 + ( 3300 – 3000 ) = 3600

The S&P 500 is edging lower and follow-through below 1980 would indicate another correction. Respect of support at 1950, however, would suggest that the up-trend is intact. Sideways movement on 21-day Twiggs Money Flow, reflects further consolidation.

S&P 500

* Target calculation: 2000 + ( 2000 – 1900 ) = 2100

CBOE Volatility Index (VIX) below 20 is typical of a bull market.

S&P 500 VIX

China’s Shanghai Composite Index breakout above 2250 signals a primary up-trend. The monthly chart, however, reflects further resistance at 2450/2500*. Rising 13-week Twiggs Money Flow indicates accelerating buying pressure. Reversal below 2250 is most unlikely, but would suggest further consolidation between 2000 and 2250.

Shanghai Composite Index

* Target calculation: 2250 + ( 2250 – 2000 ) = 2500

The ASX 200 broke support at 5540/5560, warning of a correction. Bearish divergence on 21-day Twiggs Money Flow indicates medium-term selling pressure. Respect of support at 5440/5460 would indicate that the primary up-trend is intact, while a fall below 5360 would warn of a down-trend.

ASX 200

* Target calculation: 5650 + ( 5650 – 5450 ) = 5850

September 11, 2014

European resistance

Germany’s DAX found resistance at 9700/9800. Recovery of 13-week Twiggs Money Flow above zero indicates short-term buying pressure, but the long-term signal remains bearish. Reversal below 9300 would warn of another test of primary support at 9000.

DAX

Dow Jones Euro Stoxx 50 is testing resistance at the recent high of 3300. But declining 13-week Twiggs Money Flow again warns of long-term selling pressure. Breakout above 3300 is unlikely but would suggest another advance, while reversal below 3200 — or Twiggs Money Flow below zero — would warn of another correction.

Dow Jones Euro Stoxx 50

The Footsie appears unfazed by threats of Scottish independence, testing long-term resistance at 6850/6900. 13-Week Twiggs Money Flow troughs above zero indicate healthy buying pressure, but there is a major psychological barrier at the 1999 high of 6900/7000. Narrow consolidation below this level would be a bullish sign, while a correction to test primary support at 6500 would suggest further hesitancy.

FTSE 100

* Target calculation: 7000 + ( 7000 – 6000 ) = 8000

September 10, 2014

Aussie Dollar & Yen break support

Dollar strength is affecting not only gold and commodities, but even the strongest of the currency crosses.

The Aussie Dollar broke support at $0.92 against the greenback, warning of a correction. Expect support at $0.89. Reversal of 13-week Twiggs Momentum below zero, however, suggests a primary down-trend — confirmed if primary support at $0.87 is penetrated. Recovery above $0.925 is unlikely, but would indicate a false break.

Aussie Dollar

The greenback similarly broke through resistance at ¥105.50 against the Japanese Yen. Rising 13-week Twiggs Momentum above zero signals a primary up-trend. Reversal below ¥105 is unlikely, but would warn of another test of ¥104.

USD/JPY

* Target calculation: 105.5 + ( 105.5 – 101 ) = 110

The Euro is already in a primary down-trend against the Dollar. Declining 13-week Twiggs Momentum, below zero, confirms a strong down-trend. Expect support at $1.2750/$1.2800, but a rally is unlikely to break the descending trendline and resistance at $1.31.

Euro/USD

* Target calculation: 1.35 – ( 1.40 – 1.35 ) = 1.30

September 9, 2014

Richard Koo: Revitalizing the Eurozone without Fiscal Union, April 2012

Richard Koo in a 2012 paper identifies 3 challenges facing the eurozone:

The current crisis in the eurozone consists essentially of two macroeconomic problems and one capital flow problem. The first macro problem is profligate government spending, as exemplified by Greece. In such cases austerity is required: the government must cut spending and raise taxes to regain its financial health and credibility.The second macro problem is massive private sector deleveraging in spite of record low interest rates observed in countries such as Spain, Ireland and Portugal following the bursting of their real estate bubbles.

The problem with capital flows is specific to sharing a common currency in the eurozone:

When presented with a deleveraging private sector, fund managers in non-eurozone countries can place their money only in their own government’s bonds if constraints prevent them from taking on more currency risk or principle risk. Consequently, a large portion of excess private savings must be invested in JGBs in Japan, Gilts in the UK, and Treasuries in the US. In contrast, eurozone fund managers who are not allowed to take on more principle risk or currency risk are not required to buy their own country’s bonds: they can also buy bonds issued by other eurozone governments because they all share the same currency. Thus, fund managers at French and German banks were busily moving funds into Spanish and Greek bonds a number of years ago in search of higher yields, and Spanish and Portuguese fund managers are now buying German and Dutch government bonds for added safety, all without incurring foreign exchange risk. The former capital flow aggravated real estate bubbles in many peripheral countries prior to 2008, while the latter flow triggered a sovereign debt crisis in the same countries after 2008.

His solution:

There is a simple and straightforward solution to the two macro problems and one capital flow problem described above: eurozone governments should limit the sale of their government bonds to their own citizens. In other words, only German citizens should be allowed to purchase Bunds, and only Spanish citizens should be able to buy Spanish government bonds. If this rule had been in place from the outset of the euro, none of the problems affecting the single currency today would have happened.

September 8, 2014

David Cameron can’t help the No campaign…. | The Guardian

Charle Brooker on David Cameron and Scotland’s independence referendum:

Cameron can’t help here, of course. In Scotland, David Cameron is less popular than Windows 8. He’s the physical embodiment of everything a fair percentage of Scottish people hate: a ruddy-faced old Etonian walking around like he just inherited the place, sporting a permanently shiny chin as though he’s just enjoyed a buttery crumpet in front of the cricket….

September 7, 2014

Financial reform: Call to arms | FT.com

Martin Wolf on how much capital banks should be required to hold:

The new regulatory regime is an astonishingly complex response to the failures of this model. But “keep it simple, stupid” is as good a rule in regulation as it is in life. The sensible solution seems clear: force banks to fund themselves with equity to a far greater extent than they do today.

So how much capital would do? A great deal more than the 3 per cent ratio being discussed in Basel is the answer. As Anat Admati and Martin Hellwig argue in their important book, The Bankers’ New Clothes, significantly higher capital – with true leverage certainly no greater than 10 to one and, ideally, lower still – would bring important advantages: it would limit the implicit subsidy to banks, particularly “too big to fail” ones; it would reduce the need for such intrusive and complex regulation; and it would lower the likelihood of panics.

An important feature of higher capital requirements is that these should not be based on risk-weighting. In the event, the risk weights used before the crisis proved extraordinarily fallible, indeed grossly misleading…..

There is no magic in the number of 10 times leverage (or 10% Tier 1 Capital to Total Assets) but the larger the buffer, the greater the protection against fluctuations in asset values. The Basel III minimum leverage ratio of 3% is too low to offer adequate protection, even with the highest quality assets, and while 10% is not readily attainable in the short-term, it makes a suitable long-term target.

September 7, 2014

A Prominent Financial Columnist Is Calling For Radical Reforms To The Global Economy | Business Insider

From The Economist review of Martin Wolf’s new book “The Shifts and the Shocks: What We’ve Learned–and Have Still to Learn–from the Financial Crisis”:

To make finance safer, Mr Wolf suggests replacing a fractional reserve banking system, which takes in deposits and lends most of them out in longer-term loans, with a system of “narrow banking”, where deposits must be backed by government bonds. To sustain demand without relying on dangerous asset bubbles, he proposes permanent “helicopter money”, where governments run deficits that are financed by the central bank. For a man of the mainstream, this is brave stuff.

Fractional reserve banking is inherently unstable and responsible for many of the problems in our economic system, but abandoning it completely in favor of “narrow banking”, where deposits are fully-backed by government bonds, seems unnecessary. Increasing Tier 1 capital requirements to 10 percent of total exposure, from the current 3 to 5 percent, should provide a sufficient buffer to withstand most financial shocks. Rapid expansion of credit during an asset bubble would be difficult, with high capital requirements forcing banks to be more selective in their lending. Even more so if supplemented by central bank monetary policy to counteract rapid deposit growth.