Category: UK & Europe

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Euro rallies on hope of bank rescue

The euro is headed for a test of $1.40 against the greenback, on the hope that European banks will be re-capitalized after taking a haircut on the PIIGS bonds. There still appears to be some confusion — I suspect deliberate — as to who will pay, with German Finance Minister Wolfgang Schaeuble suggesting that banks first attempt to raise money from investors. Given the current state of financial markets, private investment will be scarce and European taxpayers are likely to end up with sizable stakes in a number of banks. Expect resistance at $1.40 to be followed by another test of support at $1.30*.

EURUSD

* Target calculation: 1.40 – ( 1.50 – 1.40 ) = 1.30

The pound is similarly headed for resistance at $1.60. Respect would signal another test of $1.53.

GBPUSD

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

Canada’s Loonie and the Aussie dollar both benefited from a surge in commodity prices. Expect the CADUSD to find resistance at parity, followed by another test of support at $0.94.

CADUSD

* Target calculation: 1.00 – ( 1.06 – 1.00 ) = 0.94

The Aussie will find resistance between $1.02 and the descending trendline. Respect is likely and would indicate another test of $0.94.

AUDUSD

* Target calculation: 1.02 – ( 1.10 – 1.02 ) = 0.94

The Aussie has formed a broad double bottom against its Kiwi counterpart. AUDNZD breakout above $1.28 would signal a primary advance to $1.32*.

AUDNZD

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

Support is holding firm on the dollar-yen cross — with assistance no doubt from the BOJ. Expect a narrow range between 76 and 78.

USDJPY

The South African rand is testing support at R7.70 against the greenback, after penetrating its rising trendline. Probably because of all the visitors returning early from the Rugby World Cup. 🙂 Apparently they have invited the referee to run a series of clinics in South Africa on his novel interpretation of the forward-pass rule. I suggest that he decline — it could get violent. Failure of support would offer a target of R7.00*

USDZAR

* Target calculation: 7.70 – ( 8.40 – 7.70 ) = 7.00

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Euro-Zone Industrial Production Rises – WSJ.com

Industrial production across the 17 countries that share the euro increased at an unexpectedly strong pace in August and for the second straight month.The increase is partly a result of big output increases in Ireland and Portugal, two countries that received bailouts from the European Union and the International Monetary Fund.The European Union’s official statistics agency Eurostat said Wednesday industrial production rose by 1.2% from a month earlier and was up 5.3% from a year earlier.

via Euro-Zone Industrial Production Rises – WSJ.com.

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Too-big-to-fail is here to stay

Lehman Brothers’ collapse in 2008 was intended to intended to teach financial markets that they could not rely on an implicit government guarantee for too-big-to-fail (TBTF) banks. What bondholders learned was the opposite: never again would an institution of that size be allowed to collapse because of the de-stabilizing effect on the entire financial system.

Rescue of Dexia by French, Belgium and Luxembourg governments is the latest example. Bond-holders received 100 cents in the dollar/euro. Markets are just too fragile to consider giving bondholders a haircut. Denmark earlier had to back down from forcing haircuts on bondholders when Danish banks found themselves shut out of funding markets. [WSJ]

Frequent calls for TBTF institutions to be broken up have proved ineffective. Instead the problem has grown even larger with post 2008 rescue/take-overs of Countrywide and Merrill Lynch (BofA), Bear Stearns and WaMu (JPM), Lehman (Barclays), and Wachovia (Wells Fargo) reinforcing Willem Buiters’ survival of the fattest observation.

Proposals to reduce systemic risk through adoption of the Volcker Rule, which would prevent banks form trading for their own account, are proving difficult to implement. The 298-page first draft offers few clear definitions of restricted activities, instead calling for suggestions or feedback.[Bloomberg] Drafters should consider turning the rule around, offering a list of approved activities that banks can pursue, rather than attempting to define what they cannot. I have great respect for banks’ ability to find loopholes in any restrictive list.

The Rule on its own, however, cannot protect taxpayers from future bailouts. It does not prevent banks from over-lending if there is another bubble. There is only one solution: increase capital ratios — and apply similar ratios to securitized assets. Increases would have to be gradual, as some banks could respond by shrinking assets rather than raising capital — which would have a deflationary effect on the economy. Changes would also have to be sensitive to the economic cycle. The easiest way may be to set a long-term target (e.g. 20% Tier 1 + 2 capital by 2030) and leave implementation to the central bank as part of its monetary policy.

Together with the Volcker Rule, increased capital ratios are our best defense against a recurrence of the GFC.

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FTSE 100 buyers scarce

The FTSE 100 index encountered resistance at 5400. Low volume indicates that buyers were scarce and another test of support at 5000 is likely. We are in a primary down-trend and failure of support would signal a decline to 4400*.

FTSE 100 Index

* Target calculation: 5000 – ( 5600 – 5000 ) = 4400

The DAX index is starting to rally on the weekly chart, with 13-week Twiggs Money Flow indicating medium-term buying pressure. Expect a test of 6000, but again we are in a primary down-trend and another test of 5000 is likely. Failure of support would signal a decline to 4000*.

German DAX Index

* Target calculation: 5000 – ( 6000 – 5000 ) = 4000

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Fedex reflects slowing economy

A 30 percent decline on the Fedex weekly chart reflects the slowing rate of economic activity. Recovery above resistance at $70 suggests another bear market rally, but the primary trend is down. Declining 13-week Twiggs Money Flow, below zero, indicates long-term selling pressure.

Fedex

* Target calculation: 70 – (80 – 70 ) = 60

The weekly chart of Deutsche Post AG indicates similar weakness in Europe. We may see a rally test resistance at €11.00 but the primary trend is down and reversal below €9.00 would offer a target of €7.00*.

Deutsche Post DHL

* Target calculation: 9 – ( 11 – 9 ) = 7

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IMF stress tests China/Australia bust – macrobusiness.com.au

I don’t wish to be too alarming. These are stress tests and scenarios not yet reality. But, there is logic in the thought that we currently face the possibility of the final two scenarios happening simultaneously. That is, a Western recession triggered by European and US austerity (not to mention financial tumult) and a Chinese real estate pop.

via IMF stress tests China/Australia bust – macrobusiness.com.au | macrobusiness.com.au.

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Merkel, Sarkozy Claim Broad Agreement to Shore Up Banks – WSJ.com

German Chancellor Angela Merkel and French President Nicolas Sarkozy said Sunday that they have reached broad agreement on a plan to shore up Europe’s battered banks and restore stability to the euro zone.Speaking to reporters in the Berlin chancellery ahead of a working dinner as aides and ministers from both governments looked on, Mrs. Merkel and Mr. Sarkozy provided few details of the plan, pledging to unveil a comprehensive solution to the nearly two-year-old euro zone debt crisis by the end of the month. The plan will include a sweeping recapitalization of European banks endangered by a possible sovereign default in Greece as well as changes to existing European treaties to accelerate integration of the 17 euro-zone countries.

via Merkel, Sarkozy Claim Broad Agreement to Shore Up Banks – WSJ.com.

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America’s Debt Crisis: Why Europe Is Right and Obama Is Wrong – SPIEGEL ONLINE

American economists, central bankers and fiscal policy makers have reinterpreted British economist John Maynard Keynes’s clever idea that government spending is the best way to counteract a serious economic downturn — and have turned it into a permanent prescription. In their version of the Keynesian theory, declining growth or tumbling stock prices should prompt central banks to lower interest rates and governments to come to the rescue with economic stimulus programs. US economists call this “kick-starting” the economy.

….The only problem is that this method of encouraging growth has not stimulated the US economy in recent years, but in fact has put it on a crash course. From the Asian economic crisis to the Internet and subprime mortgage bubbles, economic stimulus programs by monetary and fiscal policy makers have regularly laid the groundwork for the next crash instead of encouraging sustainable growth. In the last decade, the volume of lending in the United States grew five times as fast as the real economy.

via America’s Debt Crisis: Why Europe Is Right and Obama Is Wrong – SPIEGEL ONLINE – News – International.

With thanks to Barry Ritholz

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Bank of England Expands Quantitative Easing – WSJ.com

The Bank of England said Thursday it will buy £75 billion of government bonds in a fresh bout of quantitative easing aimed at stimulating the U.K.’s stagnant economy.

….The decision sent sterling sharply lower. The pound plummeted to a 15-month low against the dollar, trading at $1.5286 from $1.5459 before the decision. Prices for government bonds surged.

via Bank of England Expands Quantitative Easing – WSJ.com.

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