European banks in recent years dramatically boosted lending to emerging markets and were among the biggest cross-border lenders in these countries. Their retreat has tightened credit in industries—from aircraft to media to mining — squeezing economies already feeling the effects of reduced demand from the developed world for their exports….”We’re in a very vulnerable position that’s definitely impacting global growth,” Gail Kelly, chief executive of Australia’s Westpac Bank said at The Wall Street Journal CEO Council last week. “It’s certainly impacting in my country and in Asia.”
Europe: breach of medium-term support would signal decline
Italy’s MIB index is testing medium-term support at 15000 on the weekly chart. Failure — and respect of the descending trendline — would warn of another decline, with a target of 9000*. Breach of primary support at 13000 would confirm.
* Target calculation: 13 − ( 17 − 13 ) = 9
France’s CAC-40 index is similarly testing support at 3000. Breach of support would warn of another decline — as would reversal of 13-week Twiggs Money Flow below zero. Failure of primary support at 2700 would offer a target of 2000*.
* Target calculation: 2700 – ( 3400 − 2700 ) = 2000
The DAX is also testing medium-term support. Reversal below 5600 would warn of another test of primary support at 5000. Failure of 5000 would offer a target of 3600*.
* Target calculation: 5000 – ( 6400 − 5000 ) = 3600
Even the FTSE 100 index is testing medium-term support. 13-Week Twiggs Money Flow looks stronger than its European neighbors, but reversal below zero would warn of a further decline. Breach of medium-term support at 5350 would warn of a test of primary support at 4800.
* Target calculation: 4800 – ( 5600 − 4800 ) = 4000
Debt Crisis Contagion: The Euro Zone’s Deadly Domino Effect – SPIEGEL ONLINE – News – International
The main problem of a Greek exit from the euro zone is not necessarily the direct impact on banks. I believe our government when they say that they would be able to get that under control. The real problem is the next domino. The crisis will spread unchecked to Italy. If Greece leaves the euro zone, then owners of Greek bonds will lose their entire investment. At best, the Greeks would pay them back a small part of their investment — in almost worthless drachmas.
So what kind of investor in his or her right mind would purchase Portuguese, Spanish or Italian sovereign bonds in this kind of situation? Not even a yield of 7 percent can make up for all the risk that Italy won’t be able to pay back its debt. As things now stand, Italy’s debt accounts for 120 percent of its annual GDP, growth is close to zero and the country is currently slipping into a deep recession. In fact, it’s a matter of mathematical inevitability that Italy won’t be able to service its loans if interest rates on its sovereign debt don’t fall. Granted, there have to be reforms. But reforms don’t resolve an acute debt crisis. We’ve already learned that lesson from other crises.
via Debt Crisis Contagion: The Euro Zone’s Deadly Domino Effect – SPIEGEL ONLINE – News – International.
Bill Gross: A fundamental flaw in the global economy
What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets no longer have an appetite for it.
The Anatomy of Global Economic Uncertainty – Mohamed A. El-Erian – Project Syndicate
Mohamed A. El-Erian, CEO of PIMCO, describes four key dynamics that will shape the future of the global economy:
- Many economies have built up excessive debt that is now causing market instability. They have three options for de-leveraging: default, like Greece; austerity, like the UK; or “financial repression” like the US — where “interest rates are forced down so that creditors, including those on modest fixed incomes, subsidize debtors”.
- Economic growth would reduce the ratio of debt to incomes: “Many countries, including Italy and Spain, must overcome structural barriers to competitiveness, growth, and job creation through multi-year reforms of labor markets, pensions, housing, and economic governance. Some, like the US, can combine structural reforms with short-term demand stimulus. A few, led by Germany, are reaping the benefits of years of steadfast (and underappreciated) reforms.”
- It is also important that the benefits of economic growth be shared across the entire community, reducing income inequality and related social instability.
- Political systems in Western democracies, designed to support the status quo, are ill-equipped to deal with these “structural and secular changes”. Failure to adjust is the greatest risk.
“Those on the receiving end of these four dynamics – the vast majority of us – need not be paralyzed by uncertainty and anxiety. Instead, we can use this simple framework to monitor developments, learn from them, and adapt. Yes, there will still be volatility, unusual strains, and historically odd outcomes. But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.”
via The Anatomy of Global Economic Uncertainty – Mohamed A. El-Erian – Project Syndicate.
Banks Face Funding Stress – WSJ.com
LONDON—European banks, increasingly concerned about their ability to access funding, are devising complex and potentially risky new deals that enable them to continue borrowing from the European Central Bank…..
They also are a sign that struggling banks across Europe are preparing for a period of prolonged reliance on financial lifelines from the ECB. The Continent’s intensifying financial crisis has made it difficult for many banks to obtain funding from customary market sources.
Euro drags sterling lower
The euro broke support at $1.36 and is headed for a test of primary support at $1.32. Respect of zero by 63-day Twiggs Momentum signals a strong down-trend. Failure of support would signal a decline to $1.22*.
* Target calculation: 1.32 – ( 1.42 – 1.32 ) = 1.22
The pound is also retracing, to test primary support at $1.53. 63-Day Twiggs Momentum indicates a strong down-trend. Failure of support would signal a decline to $1.45*.
* Target calculation: 1.53 – ( 1.61 – 1.53 ) = 1.45
Youth Hit as U.K. Jobless Rate Rises – WSJ.com
The Office for National Statistics said its comprehensive internationally comparable measure of unemployment rose 129,000 in the three months to September to 2.62 million, the highest level since 1994. That lifted the unemployment rate to 8.3%, the highest rate since 1996, compared with 8.1% in the three months to August.
Within that figure, the number of unemployed people between 16 and 24 years old, known as youth unemployment, rose 67,000 in the three months to September to 1.02 million, a rate of 21.9%.
ECB Fights to Put Lid on European Bond Yields – WSJ.com
Markets largely shrugged off the ECB, as long-term investors continued to dump everything but German bonds—considered the market’s safe harbor—and it became increasingly difficult to find private buyers for bonds issued by the large, indebted countries such as Italy and Spain…..The ECB fought a running battle throughout the day, traders said, in an attempt to drive the yield on the 10-year Italian note below 7%. The trading session started with price rally that drove the closely watched rate down to 6.84%. Then, as ECB buying lightened, private sellers took over, driving the yield—which moves in the opposite direction of price—up to 7.22%, according to Tradeweb data. Prices then rallied in the afternoon, with some market participants citing more ECB buying as well as comments from German Chancellor Angela Merkel indicating German support for more fiscal integration in the euro zone.
via ECB Fights to Put Lid on European Bond Yields – WSJ.com.
DJ Europe warns of selling pressure
Dow Jones Europe Index is testing medium-term support at 230. Bearish divergence on 21-day Twiggs Money Flow warns of selling pressure. Failure of support would test the primary level at 210 — and breach of primary support would signal another decline, with a target of 160*.
* Target calculation: 210 – ( 260 – 210 ) = 160