Category: UK & Europe

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ECB Unveils Bond-Buying Program – WSJ.com

By GEOFFREY T. SMITH

The ECB will buy in the secondary market only government bonds with remaining maturities between one and three years without announcing any limits in advance, and as long as the government in question is under a program approved by the euro zone.

The measures will primarily benefit fiscally troubled countries like Spain and Italy, which are facing difficulties financing their budget deficits…

via ECB Unveils Bond-Buying Program – WSJ.com.

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The work of John Maynard Keynes shows us that counter-cyclical fiscal policy and an easing of austerity may offer a way out of the Eurozone crisis. | EUROPP

Simon Wren-Lewis, professor at Oxford University and a Fellow of Merton College, says the ECB failed to undertake quantitative easing at the appropriate time because of mis-diagnosis of the problem:

The story told by many is that the Eurozone crisis is a result of fiscal profligacy in some countries, and the need to put that right quickly because of market pressure. This account misses two essential underlying causes of the crisis, which have to be recognised if a solution is to be found. The first missing element ….. private sector demand was too strong, encouraged by large capital inflows from abroad and real estate bubbles…..The second key feature of the current crisis is also a result of excess private sector demand in periphery countries, and that is a banking crisis.

……There is an underlying pattern behind Eurozone policy errors. They reflect a view that macroeconomic difficulties are primary due to bad government decisions, while private sector decisions within a free market environment do not create problems. Whatever label we want to give this view (Ordoliberal or Anti-Keynesian), it is the fundamental cause of the current Eurozone crisis. Its persistence despite all the contrary evidence allows the crisis to continue and threatens the integrity of the Eurozone itself.

via The work of John Maynard Keynes shows us that counter-cyclical fiscal policy and an easing of austerity may offer a way out of the Eurozone crisis. | EUROPP.

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European buying pressure

The FTSE 100 is testing medium-term support at 5700. Respect would test resistance at 6000/6100*, while failure would warn of a correction. A 63-day Twiggs Momentum trough above zero would strengthen the bull signal. Breakout above 6100 is still some way off but would offer a long-term target of 6750.

FTSE 100 Index

* Target calculation: 5900 + ( 5900 – 5700 ) = 6100

Dow Jones Europe Index is consolidating below 250 after breaking resistance at 240. Follow-through above 250 would signal an advance to the 2012 high of 265. Bullish divergence on 63-day Twiggs Momentum suggests a primary up-trend, but this would require a trough above zero — or breakout above 265 on the weekly chart — to confirm.

Dow Jones Europe Index

* Target calculation: 260 + ( 260 – 210 ) = 310

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Forex: Euro, Pound Sterling, Canadian Loonie, Australian Dollar and Japanese Yen

A monthly chart shows the euro testing long-term support at $1.20 against the greenback. Recovery above the steeply descending trendline would indicate another test of the upper triangle border, while failure of support would indicate long-term re-alignment. Indications, from president Mario Draghi, that the ECB will further expand its balance sheet explains euro weakness, but similar moves by the Fed would restore the status quo.

Euro/USD Monthly

On the daily chart, the Euro is headed for resistance at $1.275. The primary trend remains downward, but breach of the descending trendline indicates it is losing momentum. Failure of support at $1.240 and penetration of the rising trendline, however, would indicate another test of primary support at $1.205.

Euro/USD

Pound Sterling formed a descending triangle, testing support at €1.255 against the Euro. Failure of support would indicate a test of €1.225. 63-Day Twiggs Momentum is falling, but continues to indicate a primary up-trend.

Pound Sterling/Euro

* Target calculation: 1.255 – ( 1.285 – 1.255 ) = 1.225

Canada’s Loonie is consolidating in a narrow band below resistance against the greenback at $1.02.  Breakout above resistance at $1.02 would indicate an advance to $1.06, while reversal below parity would test $0.95/$0.96.

Canadian Loonie/Aussie Dollar

The Aussie Dollar is retracing to find support against the greenback, with $1.02 a likely target. Respect would suggest another test of $1.08. Narrow oscillation of 63-day Twiggs Momentum around zero would suggest a ranging market.

Aussie Dollar/USD

Australian Dollar appreciation against the yen is slowing. Reversal below ¥79.50 would indicate another test of primary support at ¥74.

US Dollar/Japanese Yen

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Sweden: Failure of the welfare state experiment

…..Sweden has a large welfare state and is successful. This is often seen as a proof that a ‘third way’ policy between socialism and capitalism works well, and that other nations can reach the same favourable social outcomes by simply expanding the size of government. If one studies Swedish history and society in-depth however it quickly becomes evident that this simplistic analysis is flawed. The Swedish experience might as well be used to argue for the benefits of free-market oriented policies, and as a warning of the economic and social problems that can arise when government involvement in society becomes too large…….In the long run….. even the well-functioning societies in Scandinavia have been adversely impacted by welfare dependency and high levels of taxation. The ‘third way’ policy has not persisted – it can be viewed as a short-lived and failed experiment. Throughout most of its modern history Sweden has had a favourable business environment. The period characterised by the most extensive welfare state policies, where Sweden deviated strongly from the western norm, around 1970-1995, is an exception. That period was associated with a stagnant economy.

…….The transition towards an extensive welfare state that occurred in Sweden led….. to an economic cost in terms of reduced entrepreneurship, as taxes and regulation hindered the development of private businesses. It also led to a significant crowding out of private employment. Between 1950 and 2005, the Swedish population grew from seven to nine million, but net job creation in the private sector was zero. Jobs in the public sector expanded rapidly until the end of the 1970s. As it became difficult to further expand the already large public sector, job creation simply stopped (Bjuggren and Johansson, 2009).

Nima Sanandaji, The Institute of Economic Affairs, Sweden Paper August 2012.pdf (application/pdf Object).

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European buying pressure

The FTSE 100 is retracing to test support at 5700. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure. Respect of 5700 would signal an advance to 6100; expect strong resistance at that level because of the number of previous peaks. Breakout would offer a long-term target of 6750*.

FTSE 100 Index

* Target calculation: 6000 + ( 6000 – 5250 ) = 6750

Madrid General Index is consolidating above 720 after completing a double-bottom reversal. Follow-through above 760 would signal an advance to 900*. Bullish divergence on 13-week Twiggs Money Flow indicates long-term buying pressure. Penetration of the descending trendline would strengthen the reversal signal.

Madrid General Index

* Target calculation: 750 + ( 750 – 600 ) = 900

Germany’s DAX shows strong buying pressure, with 13-week Twiggs Money Flow oscillating high above zero. Consolidation or retracement below 7200 is likely, followed by an advance to 7600. Expect strong resistance at 7500/7600 because of the number of previous peaks.

DAX Index

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Germany backs Draghi bond plan against Bundesbank – Telegraph

By Ambrose Evans-Pritchard,
9:39PM BST 20 Aug 2012

“A currency can only be stable if its future existence is not in doubt,” said Jörg Asmussen, the powerful German member of the ECB’s executive board. He signalled full backing for the bond rescue plan of ECB chief Mario Draghi, brushing aside warnings from the German Bundesbank that large-scale purchases would amount to debt monetisation and a back-door fiscal rescue of insolvent states in breach of EU treaty law.

via Germany backs Draghi bond plan against Bundesbank – Telegraph.

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European revival

Madrid General Index broke above 720 to complete a double-bottom reversal with a target of 840*. Bullish divergence on 13-week Twiggs Money Flow indicates buying pressure. Penetration of the descending trendline would strengthen the reversal signal.

Madrid General Index

* Target calculation: 720 + ( 720 – 600 ) = 840

Italian FTSE MIB Index also completed a double bottom reversal, offering a target of 16500*. Bullish divergence on 13-week Twiggs Money Flow again indicates buying pressure.

FTSE Italian MIB Index

* Target calculation: 14500 + ( 14500 – 12500 ) = 16500

The FTSE 100 is headed for a test of major resistance at 6000. Expect strong resistance between 6000 and 6100 because of the number of previous peaks at this level. Breakout would offer a long-term target of 6750*. 13-Week Twiggs Money Flow oscillating above zero suggests a primary up-trend.

FTSE 100 Index

* Target calculation: 6000 + ( 6000 – 5250 ) = 6750

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"François Hollande’s Wrong Idea of France" by Brigitte Granville | Project Syndicate

Since the euro’s introduction, unit labor costs have risen dramatically faster in France than they have in Germany. According to Eurostat data published in April 2011, the hourly labor cost in France was €34.2, compared to €30.1 in Germany – and nearly 20% higher than the eurozone average of €27.6. France’s current-account deficit has risen to more than 2% of GDP, even as its economic growth has ground to a halt.

The high cost of employing workers in France is due not so much to wages and benefits as it is to payroll taxes levied on employers. The entire French political class has long delighted in taxing labor to finance the country’s generous welfare provisions, thus avoiding excessively high taxation of individuals’ income and consumption – though that is about to come to an end as Hollande intends to slap a 75% tax on incomes above €1 million. This is a version of the fallacy that taxing companies (“capital”) spares ordinary people (“workers”).

via “François Hollande’s Wrong Idea of France” by Brigitte Granville | Project Syndicate.

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French Industrial Policies Are Aiding Rapid Decline of Peugeot – SPIEGEL ONLINE

By Dietmar Hawranek and Isabell Hülsen:

When Helping Is Hurting
Ironically, the victims of these two developments — focusing on production in France and high wage increases — are those whose cause is being championed by governments and labor representatives: the autoworkers themselves. Workers at the [Peugeot] Aulnay plant had to look on as their company went into gradual decline. Aulnay was once one of the most modern plants in the country, annually producing more than 400,000 cars. Today, fewer than 140,000 vehicles roll off its assembly lines each year. An auto plant that produces so few vehicles can hardly be profitable. If President Hollande and the unions compel Peugeot to keep the plant in operation, they will only accelerate the company’s demise.

via French Industrial Policies Are Aiding Rapid Decline of Peugeot – SPIEGEL ONLINE.

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