Category: UK & Europe

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Shanghai rising but Nikkei, ASX selling pressure

Germany’s DAX is retracing to test the new support level at 8000. Respect would confirm a primary advance, but bearish divergence on 13-week Twiggs Money Flow warns of selling pressure — a fall below zero would warn of a reversal. Breach of 8000 would test the rising trendline around 7500.
DAX Index

Dow Jones Europe encountered strong resistance at 290, but remains in a primary up-trend. Penetration of the rising trendline would warn that the trend is losing momentum, while failure of support at 270 would signal a reversal.

DJ Europe Index

The Nikkei 225 ran into massive selling between 15000 and 16000. The gravestone on the monthly chart, supported by bearish divergence on 13-week Twiggs Money Flow, warns of a reversal.

Nikkei 225 Index

India’s Sensex is headed for a test of long-term resistance at 21000, but bearish divergence on 13-week Twiggs Money Flow warns of selling pressure. Respect of resistance would indicate another test of primary support at 18000.

BSE Sensex Index

The Shanghai Composite Index respected support at 2150 and is headed for another test of resistance at 2500. Breakout above 2500 would complete an inverted head and shoulders reversal (as indicated by orange + green arrows), signaling a primary up-trend. That is still some way off but would be good news for Australia’s beleaguered resources stocks.

Shanghai Composite Index

The ASX 200 is headed for a test of primary support at 4900. Breach would also penetrate the rising trendline, indicating reversal to a primary down-trend. Bearish divergence on 13-week Twiggs Money Flow has been warning of strong selling pressure. The falling Aussie Dollar is forcing a retreat of offshore investors from the market, but the boost to export earnings is likely to present a buying opportunity for Australian investors when the correction is over.

ASX 200 Index

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China hints at bottom while S&P 500 reverses

10-Year Treasury yields are testing resistance at 2.05/2.10%. Breakout above 2.10% would signal a primary up-trend and possible test of 4.00% in the next few years. Only breakout above 4.00%, however, would end the 31-year secular bear-trend.

10-Year Treasury Yields

The S&P 500 completed a key reversal (or outside reversal), indicating selling pressure. Expect a test of the lower trend channel at 1600.

S&P 500 Index
There is no great movement in the VIX and this so far looks like a normal retracement. A June quarter-end below 1500 looks unlikely, but would present a long-term bear signal.

S&P 500 Index

The UK’s FTSE 100 Index is headed for a test of its year 2000 high at 7000. Expect a correction or consolidation below this level. Breakout remains doubtful but would signal a long-term primary advance.
FTSE 100 Index

Penetration of its descending trendline indicates correction on the Shanghai Composite Index has ended and we can expect another test of resistance at 2500. Breakout above 2500 would complete an inverted head and shoulders reversal (as indicated by orange + green arrows), signaling a primary up-trend. That would be good news for Australia’s beleaguered resources stocks.

Shanghai Composite Index

As traders we follow the trend, but in times like this it is important to remain vigilant.

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Market Insight: Central bankers turn deaf ear on balance sheets – FT.com

John Plender at FT observes:

The sheer size of the move in US Treasuries is striking. From the beginning of May to the end of last week, yields on the 30-year Treasury bond rose by nearly 40 basis points while the 10-year yield rose around 30bp. That is a measure of the market’s sensitivity to assumptions about an exit from the era of central bank balance sheet expansion. It is also an indication of how far we are from a return to normality.

Read more at Market Insight: Central bankers turn deaf ear on balance sheets – FT.com.

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Carney Warns Europe Faces Decade of Stagnation Without Key Reforms | WSJ

Nirmala Menon at WSJ quotes Mark Carney, incoming governor of the Bank of England:

Mr. Carney, currently Canada’s top central banker, said Europe can draw lessons from Japan on the dangers of taking half measures……..“Deep challenges persist in its financial system. Without sustained and significant reforms, a decade of stagnation threatens,” Mr. Carney said in his final public address as governor of the Bank of Canada.

Read more at Carney Warns Europe Faces Decade of Stagnation Without Key Reforms – Real Time Economics – WSJ.

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Forex: Aussie breaks support while Yen soars

The Aussie Dollar broke primary support at $1.015 and is testing parity against the greenback. Parity is not expected to hold and we are likely to see a test of the next major support level at $0.95/$0.96. Narrow fluctuation of 63-day Twiggs Momentum around zero continues to suggest a ranging market.

Aussie Dollar/USD

The euro is retreating, headed for another test of $1.2750. Respect would signal another attempt at $1.37, while failure would indicate a primary down-trend — testing long-term support at $1.20. The failed advance to $1.50 would be bearish; and breach of $1.20 would offer a target of $1.05*.

Euro/USD

* Target calculation: 1.20 – ( 1.35 – 1.20 ) = 1.05

Rapid expansion of the monetary base by the Bank of Japan is fueling inflation fears and weakening the yen. Lars Christensen points out that, with competitive devaluation from all quarters, exports are not likely to play a major part in a Japanese recovery. What is more likely is a consumption and investment boom as households invest in real assets as a hedge against inflation.

The greenback broke resistance at ¥100 against the Japanese Yen — a one-third appreciation from the lows of 2011/2012. Expect retracement to test the new support level, but breach of the long-term declining trendline indicates the 30-year secular bear trend is over. Long-term target for the advance is the 2007 high at ¥125*.

USD/JPY

* Target calculation: 100 – ( 100 – 75 ) = 125

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The monetary policy revolution

James Alexander, head of Equity Research at UK-based M&G Equities, sums up the evolution of central bank thinking. He describes the traditional problem of inadequate response by central banks to market shocks like the collapse of Lehman Brothers:

Although wages hold steady when nominal income falls, unemployment tends to rise as companies scramble to cut costs. In the wake of the crash, rising joblessness created a vicious circle of declining consumption and investment that proved very difficult to reverse, particularly as central banks remained preoccupied with inflation.

Failure of both austerity and quantitative easing has left central bankers looking for new alternatives:

…..Economist Michael Woodford presented a paper [at Jackson Hole last August] suggesting that the US Federal Reserve (Fed) should give markets and businesses a bigger steer about where the economy was headed by adopting a nominal economic growth target. In September, the Fed announced its third round of QE, which it has indicated will continue until unemployment falls below 6.5% – the first time US monetary policy has been explicitly tied to an unemployment rate. US stocks have since soared, shrugging off continued inaction surrounding the country’s ongoing debt crisis.

While targeting unemployment is preferable to targeting inflation, it is still a subjective measure that can be influenced by rises or falls in labor participation rates and exclusion of casual workers seeking full-time employment. Market Monetarists such as Scott Sumner and Lars Christensen advocate targeting nominal GDP growth instead — a hard, objective number that can be forecast with greater accuracy. Mark Carney, due to take over as governor of the BOE in July, seems to be on a similar path:

Echoing Michael Woodford’s comments at Jackson Hole, he advocated dropping inflation targets if economies were struggling to grow. He has since proposed easing UK monetary policy, adopting a nominal growth target and boosting recovery by convincing households and businesses that rates will remain low until growth resumes.

While NGDP targeting has been criticized as a “recipe for runaway inflation”, experiences so far have not borne this out. In fact NGDP targeting would have the opposite effect when growth has resumed, curbing inflation and credit growth and preventing a repeat of recent housing and stock bubbles.

Read more at Outlook-for-UK-equities-2013-05_tcm1434-73579.pdf.

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Eurozone risks Japan-style trap as deflation grinds closer | Telegraph

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.

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Deutsche Bank Plans Capital Boost | WSJ.com

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.

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Europe: Dax faces selling pressure while UK and Italy rally

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.
DAX Index

* 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.
FTSE MIB Index

* 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.
FTSE 100 Index

* Target calculation: 6500 + ( 6500 – 6000 ) = 7000

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