The risks to the global economy are many, but three in particular demand strong action by policymakers:
• In the euro area, banks must be made stronger, not only to avoid deleveraging and maintain growth, but also, and more importantly, to reduce risks of vicious feedback loops between low growth, weak sovereigns, and weak banks. This requires additional capital buffers, from either private or public sources.
• The top priorities in the United States include devising a medium-term fiscal consolidation plan to put public debt on a sustainable path and to implement policies to sustain the recovery, including by easing the adjustment in the housing and labor markets. The new American Jobs Act would provide needed short-term support to the economy, but it must be flanked with a strong medium-term fiscal plan that raises revenues and contains the growth of entitlement spending.
• In Japan, the government should pursue more ambitious measures to deal with the very high level of public debt while attending to the immediate need for reconstruction and development in the areas hit by the earthquake and tsunami.
How the IMF Could Try to Bolster Economy – WSJ.com
Europe needs to create a tightly coordinated fiscal policy among nations, even though European voters are wary that would mean something akin to a United States of Europe. Ms. Lagarde, a former French finance minister who is in the honeymoon phase of her IMF presidency, has credibility in Europe. Her task: come up with a specific plan for a tighter union, which she could argue benefits ordinary Europeans.
DAX key reversal; FTSE rally fades
Germany’s DAX Index shows a strong key reversal [R] on the weekly chart. Expect a rally, but we are in a bear market and resistance at 6500 is likely to hold. Reversal below 5400 would warn of another down-swing.
* Target calculation: 5500 – ( 6500 – 5500 ) = 4500
The FTSE 100 fell at Monday’s open, but the weekly chart displays a particularly volatile consolidation edging higher. Breakout above 5400 would indicate a test of 5600/5700. Again, we are in a bear market; respect of resistance is likely and would warn of another test of 4800.
* Target calculation: 5000 – ( 5600 – 5000 ) = 4400
Does the Euro Have a Future? by George Soros | The New York Review of Books
The German public still thinks that it has a choice about whether to support the euro or to abandon it. That is a mistake. The euro exists and the assets and liabilities of the financial system are so intermingled on the basis of a common currency that a breakdown of the euro would cause a meltdown beyond the capacity of the authorities to contain. The longer it takes for the German public to realize this, the heavier the price they and the rest of the world will have to pay.
via Does the Euro Have a Future? by George Soros | The New York Review of Books.
Sterling fallout
The pound, affected by euro fallout, broke support at $1.59 to signal a primary down-trend. Expect a test of its December 2010 low at $1.53*
* Target calculation: 1.60 – ( 1.67 – 1.60 ) = 1.53
Euro sinks
The euro found short-term support at $1.35 against the greenback but is now weakening. Failure of support would confirm the target of $1.30*. A peak below zero on the 63-day Momentum oscillator would confirm the primary down-trend.
* Target calculation: 1.40 – ( 1.50 – 1.40 ) = 1.30
Europe Is Urged to Take Bolder Action on Debt – NYTimes.com
“China is a poor country with only $4,000 per capita income,” Yu Yongding, a Chinese top economist and former member of the central bank’s monetary policy committee said in an interview in China. “To talk and think about China to rescue countries with $40,000 per capita incomes is ridiculous.”
China is ready to help, Mr. Yu said, “but European countries first should show that they have a clear road map and convincing policies to preserve the euro and solve their problems as well as the political will to make necessary sacrifices.”
via Europe Is Urged to Take Bolder Action on Debt – NYTimes.com.
Europe breaks support
DJ Europe Index broke support at 225, signaling another down-swing to the 2010 low at 205. The calculated target is lower at 195.
* Target calculation: 230 – ( 265 – 230 ) = 195
European indices warn of another down-swing
The German DAX Index broke support at 5500 to warn of a down-swing to 4500*. Declining 13-week Twiggs Money Flow below zero indicates strong selling pressure.
* Target calculation: 5500 – ( 6500 – 5500 ) = 4500
In France, the CAC-40 Index reversed below support at 3000, led by a sell-off in French banks. Expect support at the 2009 low of 2500, though the calculated target is even lower. 13-Week Twiggs Money Flow again signals strong selling pressure.
* Target calculation: 3000 – ( 3700 – 3000 ) = 2300
The FTSE 100 is consolidating above 5000, but is likely to be dragged lower if major European trading partners fall. Breach of support would offer a target of 4400*.
* Target calculation: 5000 – ( 5600 – 5000 ) = 4400
Woes at French Banks Signal a Broader Crisis – WSJ.com
Greece will run out of money within weeks if it can’t end a standoff with the International Monetary Fund and the EU. In a last-ditch effort to overcome the impasse with its international lenders, Greece’s government said Sunday that it would impose a new property tax to cover a €2 billion shortfall in budget targets this year. Investors worry that if the dispute goes unresolved, Greece could suffer a messy default, with untold consequences for Europe’s banks.
French banks’ overall exposure to Greece is about €65 billion, according to the Bank of International Settlements.