Category: UK & Europe

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Europe approaches zero hour

As I mentioned in an earlier post, there is bound to be a relief rally when EU leaders announce details of their rescue package — followed by a pull-back when traders figure out the costs. The danger is that Germany and France do an “Ireland” and rescue the banks but put themselves at risk. Both have public debt to GDP ratios close to 80 percent and it would not take much to push them into the danger zone. A down-grade would raise their cost of funding and place their own budgets under pressure. If they are down-graded then the kids are home alone — there will be no adults left in the room.

The FTSE 100 displays a decent bullish divergence on 13-week Twiggs Money Flow, warning of strong buying pressure. Breakout above 5600 would offer a target of 6000*, but expect retracement to test the new support level. Respect would confirm the advance.

FTSE 100 Index

* Target calculation: 5500 + ( 5500 – 5000 ) = 6000

Germany’s DAX is headed for 6500, but a weaker recovery on Twiggs Money Flow suggests this is a bear market rally. Respect of 6500 would indicate another test of 5000.

DAX Index

The French CAC-40 index displays secondary buying pressure. Respect of 3700 would signal another test of primary support at 2800.

CAC-40 Index

Madrid rallied to test resistance at 900. Again buying pressure on 13-week Twiggs Money Flow appears secondary. Respect of 900 would signal a decline to the 2009 low of 700. Breakout, however, would signal a rally to test the descending trendline.

Madrid General Index

Italy’s MIB index is testing the descending trendline near 16500. Respect would test the 2009 low at 12500. Breakout would offer a target of 19000*.

FTSE MIB Index

* Target calculation: 16 + ( 16 – 13 ) = 19

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Euro Zone – ‘Miserable’ Euro PMI Heightens Recession Risk: Economists – CNBC

The euro zone’s manufacturing PMI fell to 47.3 in October, its lowest level since July 2009, with German manufacturing falling for the first time in two years because of a combination of drops in output and new orders and backlogs of work.

The fall in euro zone PMI “reflected steep declines in both the manufacturing and services indices, suggesting that the deterioration in growth prospects reflects developments both at home and abroad,” Ben May, European economist at Capital Economist, wrote in a market note.

via Euro Zone – ‘Miserable’ Euro PMI Heightens Recession Risk: Economists – CNBC.

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Europe Leaders Debate Severe Options for Accord – WSJ.com

“For the first time, I found the leadership of the euro zone focusing on the fundamentals here in respect to the situation arising from Greece, and the fear of contagion,” said Irish Prime Minister Enda Kenny. “There was clearly an understanding that the world is watching Europe and that there isn’t any point in doing this in a half-hearted fashion.”

The options being debated now are more severe and far-reaching than those under consideration in months past. Last year, when the crisis first threatened the euro zone’s stability, leaders insisted that Greece would not default and that assistance would only be provided to countries on the brink of collapse, and at punitive cost to discourage free-riders.

Now, the question is how big a default Greece will have, and leaders are scrambling to open floodgates of aid to several countries.

via Europe Leaders Debate Severe Options for Accord – WSJ.com.

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France appears to have conceded to German-ECB position on bailout fund | Credit Writedowns

France appears to have backed down in the face of a German-ECB joint position that strenuously objected to the EFSF becoming a bank to borrow from the ECB. Instead, it appears that the insurance/guarantee function of the EFSF is going to dominate. Although the situation still appears fluid, the momentum seems to favor those who want to have this guarantee function only for new issuance of Spain and Italy.

via France appears to have conceded to German-ECB position on bailout fund | Credit Writedowns.

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Crunch Time for Franco-German Relations – WSJ.com

…what euro-zone leaders appear to be inching toward is yet another fudge: a Greek deal that avoids default but still falls short of putting debt on a sustainable basis; a bank recapitalization that’s not sufficient to withstand multiple defaults and an expanded bailout fund that isn’t big enough to restore the confidence of sovereign and bank debt markets. That would send a worrying signal that the rift between Germany and France hasn’t been mended. And the longer they leave it, the wider it is sure to grow.

via Crunch Time for Franco-German Relations – WSJ.com.

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Europe’s highly-leveraged banking sector

Comparing common equity to total assets, 10 major European banks are leveraged more than 25 to 1 (a ratio of less than 4.0%).  According to The Big Picture, Dexia is the highest at close to 77 times, but the others are:

  • Deutsche Bank
  • Credit Agricole
  • Credit Suisse
  • Commerzbank
  • Barclays
  • ING
  • BNP Paribas
  • Societe Generale
  • UBS.

Using total equity may indicate slightly lower leverage but the results offer some idea as to why the  issue of recapitalizing banks is taking so long to resolve.

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Three Ways to Save the Eurozone – Jean Pisani-Ferry – Project Syndicate

The eurozone’s creeping fragmentation is primarily the result of the mutual dependence of banks and governments. In the eurozone, banks are vulnerable to sovereign-debt crises because they hold a lot of government bonds – frequently issued by their country of origin. Governments, for their part, are vulnerable to bank crises because they are individually responsible for rescuing national financial institutions. Each episode in the current crisis illustrates the fragility caused by this interdependence.

via Three Ways to Save the Eurozone – Jean Pisani-Ferry – Project Syndicate.

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Greece: Banks and Pols at Impasse

The debate over how to divide the costs of rescuing Greece is one of the central questions European officials hope to resolve at a weekend summit that comes almost two years to the day after a newly elected government in Athens admitted that the country’s finances were “off the rails.”

……On Wednesday evening, an unexpected gathering of top European officials and IMF Managing Director Christine Lagarde in Frankfurt failed to bridge a divide between Germany, which is footing much of Greek’s bill and supports larger private-sector losses, and France, which is more concerned about the impact of greater losses on its banks.

via Greece: Banks and Pols at Impasse.

My money is on Germany — and a bigger haircut for banks. Then the next headache is how to recapitalize the banks. The cause of the problem: Basel II allowed 50:1 leverage on government (including Greek) bonds.

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Draft Proposes Fast, Flexible Bailout Fund – WSJ.com

According to the draft guidelines, the EFSF would replace the European Central Bank in its role of intervening in sovereign-debt markets, but the EFSF’s scope for action would be more limited. The EFSF, for example, would only be allowed to purchase euro-denominated bonds in the open market that are issued by the public sector.

On primary market purchases—bonds bought directly from issuers—the EFSF purchases would be restricted to countries already receiving aid or precautionary credit and be limited to 50% of the total auction. Purchases of sovereign bonds in primary markets would require prior approval of European finance ministers.

The guidelines also…….. allows the fund to engage in limited leveraging of its assets.

via Draft Proposes Fast, Flexible Bailout Fund – WSJ.com.

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Forex overview

The euro is consolidating above $1.365; failure of support would re-test $1.315, warning of another primary decline. A 63-day Twiggs Momentum peak below the zero line would confirm a strong primary down-trend.

EURUSD

* Target calculation: 1.32 – ( 1.40 – 1.32 ) = 1.24

The pound retraced to test resistance at $1.59/1.60 on the weekly chart. Declining 63-day Twiggs Momentum, below zero, suggests a strong down-trend. Reversal below $1.53 would offer a target of $1.46*.

GBPUSD

* Target calculation: 1.53 – ( 1.60 – 1.53 ) = 1.46

Canada’s Loonie resembles the Aussie dollar: reversal below short-term support at $0.975 would test $0.94. Respect of the descending trendline would also warn of a decline to $0.88*.

CADUSD

* Target calculation: 0.94 – ( 1.00 – 0.94 ) = 0.88

The Aussie dollar is testing support at $1.28 against its Kiwi counterpart after completing a double bottom. Respect of support would confirm the target of $1.32*.

AUDNZD

* Target calculation: 1.28 + ( 1.28 – 1.24 ) = 1.32

The greenback is ranging in a narrow band above ¥76, supported by the Bank of Japan. 63-Day Twiggs Momentum holding below zero confirms the strong down-trend.

USDJPY

The greenback recovered above R8.00 on the weekly chart against the South African Rand. Expect another test of R8.50. Upward breakout would warn of an accelerating up-trend that is likely to lead to a blow-off.

USDZAR

* Target calculation: 8.50 + ( 8.50 – 7.70 ) = 9.30

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