Here’s A Disturbingly Astute Line From When S&P Downgraded The US Credit Rating | Business Insider Australia

From S&P’s historic downgrade of the US credit rating on August 5, 2011:

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

Read more at Here's A Disturbingly Astute Line From When S&P Downgraded The US Credit Rating | Business Insider Australia.

Forex: Euro and Aussie rise as Dollar weakens

The Euro respected support, on a brief retracement to $1.34/$1.3450, before following through above the last two week’s high — signaling a test of the February high at $1.37. Breakout would offer a long-term target of $1.46*. The trough above zero on 13-week Twiggs Momentum indicates a healthy up-trend. Respect of resistance is unlikely, but would warn of another correction.

Euro/USD

* Target calculation: 1.37 + ( 1.37 – 1.28 ) = 1.46

The greenback is heading for a test of primary support at ¥96 after breaking short-term support at ¥98 on the daily chart. Failure of support would offer a target of ¥92*. Reversal of 13-week Twiggs Momentum below zero would also warn of a primary down-trend. Recovery above the descending trendline is unlikely at present, but would indicate a rally to ¥100.50.

USD/JPY

* Target calculation: 96 – ( 100 – 96 ) = 92

The Aussie Dollar has so far respected support at $0.93 against the greenback. Follow-through above $0.94 would suggest an advance to $0.97; confirmed if resistance at $0.95 is broken. Reversal below $0.93, however, would warn of a correction to primary support at $0.89.

Aussie Dollar

* Target calculations: 0.95 + ( 0.95 – 0.93 ) = 0.97

The Aussie continues to test support at $1.12 against its Kiwi neighbour. Tall shadows (wicks) for the last two weeks indicate selling pressure. Failure of support would offer a target of $1.08*. Recovery above the descending trendline is less likely, but would suggest an advance to $1.20; breakout above $1.16 would confirm, completing a double-bottom reversal.

Kiwi Dollar

* Target calculations: 1.12 – ( 1.16 – 1.12 ) = 1.08

China: US Shutdown Exposes ‘Ugly Side of Partisan Politics’

Reuters Shanghai:

China on Wednesday said the U.S. government shutdown had exposed “the ugly side of partisan politics” in Washington and expressed concern about its effect on the world economy.

An editorial on the state-run Xinhua news service, considered a channel for Beijing’s official views, said: “The United States, the world’s sole superpower, has engaged in irresponsible spending for years.”

“In the view of the latest political failure, a replay of the 2011 summer drama seems likely, which is certainly a concern for U.S. foreign creditors,” it said.

“With no political unity to redress its policy mistake, a dysfunctional Washington is now overspending the confidence in its leadership,” the editorial said.

Chinese leaders must be both puzzled and perplexed by the current spat between Congress and the Senate. How can a government which considers itself a beacon of democracy — and which advocates democracy to emerging nations — exhibit such disfunctional behavior? Separation of duties between the President, Congress and the Senate — designed to safeguard the nation from excessive concentration of power — have evolved into a recurring political logjam. Both major parties are guilty of burdening future taxpayers with public debt, in order to buy off existing voters, and kicking the can down the road — avoiding unpopular political decisions that are in the long-term interests of the nation. Failure to address unsustainable welfare spending, for example, has allowed unfunded liabilities to balloon to more than $70 trillion by 2012.

Weak political coalitions have also led to unstable government and a short-term focus in many Western democracies. These issues are completely foreign to China’s Central Committee.

The Central Politburo Standing Committee (“PSC”) of the Communist Party of China is a committee of 7 members appointed by the Chinese Communist Party to run the country, with Li Jinping acting as General Secretary. No political group has the power to block decisions of the Committee, allowing them to focus on long-term goals rather than short-term considerations. Ascendancy of the PSC is one of the major contributing factors to China’s phoenix-like rise from the ashes of decades of political turmoil.

I am not advocating that we abandon democracy and revert to a one-party state, but we need to address the weaknesses in our current system and adopt some of the strengths of others. An outstanding example of this is the Swiss system where a similar central committee is democratically elected, based on proportional representation. All parties are represented on the 7-member Federal Council and decision-making is collective. Council members serve one year terms as the largely-ceremonial head of state. The strength of the system is its stability, with only one change to the composition of the 7-member Council over the last 50 years. This enables members to focus on long-term goals rather than on short-term political concerns — one of the reasons why the Swiss economy is one of the most stable and successful, ranked 8th in the world in terms of GDP per capita according to the IMF.

Powers of the central committee are restrained by a vibrant direct democracy where citizens regularly vote on national referendums. The power of voters to overturn their decisions maintains a strong check on the central committee throughout their elected term and would also curb the influence of special interest groups, another abscess on butt of many democracies.

While most recognize the need for change, a major obstacle is the power of vested interests that are likely to impede progress at every turn. Only a major ground-swell of popular support could sweep them aside. In a way we should welcome crises like the current impasse, as further cracks in the dam wall of public opinion. When the wall breaks, hopefully we can build a better system…..if we have learned from our past mistakes.

Read more at China: US Shutdown Exposes 'Ugly Side of Partisan Politics'.

TSX 60 bearish divergence

Canada’s TSX 60 index is testing long-term resistance at 740, but bearish divergence on 13-week Twiggs Money Flow warns of selling pressure. Reversal below 730 would indicate another test of primary support at 710. Failure of support would signal a primary down-trend.

TSX 60

The VIX below 15, however, continues to reflect low market risk.

TSX 60 VIX

Short-term support for S&P 500 but long-term bearish

The September quarter-end often heralds a correction as fund managers re-balance their portfolios and shed under-performing stocks.

The S&P 500 is testing support at the May high of 1675 on the daily chart. The long tail on Monday’s candle indicates short-term buying support, but bearish divergence on 21-day Twiggs Money Flow warns of medium-term selling pressure. Breach of support and the (secondary) rising trendline would signal a test of primary support at 1625.

S&P 500

Selling pressure is also evident on the weekly chart, where a similar divergence warns of a primary reversal. This is a relatively weak signal, with 13-week Twiggs Money Flow elevated well above zero and primary support some way above the long-term rising trendline. Failure of support at 1625 would signal a reversal, but it would be prudent to wait for confirmation from the long-term trendline or other major indexes.

S&P 500

* Target calculation: 1700 + ( 1700 – 1550 ) = 1850

VIX crossed to above 15, but still indicates relatively low market risk.

VIX Index

Dow Jones Industrial Average broke its (secondary) rising trendline, signaling a test of primary support at 14800. Bearish divergence on 13-week Twiggs Money Flow warns of a reversal and breach of 14800 would confirm. Recovery above 15660 is unlikely, but would indicate a fresh advance.

Dow Jones Industrial Average

Buy Yen on Debt Debacle? | WSJ

Ian Talley at WSJ reports:

In, “The Curious Case of the Yen: A Safe Haven Currency without Inflows” (see p.142) the IMF studied 11 shocks between the August 1990 U.S. savings and loan crisis and the August 2011 U.S. debt ceiling confrontation that pushed the volatility index 10 percentage points higher than its previous 60-day average. “The yen has tended to appreciate on average during these episodes, against the U.S. dollar, the euro and in nominal and real effective terms,” the IMF found.

Read more at Buy Yen on Debt Debacle? – Real Time Economics – WSJ.

Forex: Aussie and Euro breakout

The Euro broke through resistance at $1.34/$1.3450, offering a medium-term target of $1.37* and long-term target of $1.40*. A trough above zero on 13-week Twiggs Momentum indicates a healthy up-trend.

Euro/USD

* Target calculation: 1.34 + ( 1.34 – 1.31 ) = 1.37; 1.34 + ( 1.34 – 1.28 ) = 1.40

The greenback is ranging aimlessly between ¥96 and ¥101 against the yen, indicating uncertainty. Breakout from the range will indicate future direction. Reversal of 13-week Twiggs Momentum below zero would suggest a primary down-trend.

USD/JPY

* Target calculation: 101 + ( 101 – 96 ) = 106

The Aussie Dollar retraced to test support at $0.93/$0.935 against the greenback after its recent breakout. Respect is likely and would suggest an advance to $0.97*. Follow-through above $0.95 would confirm.

Aussie Dollar

* Target calculations: 0.95 + ( 0.95 – 0.93 ) = 0.97

The Aussie found support at $1.12 against its Kiwi neighbour. Recovery above $1.16 and the descending trendline would complete a double-bottom reversal, offering a target of $1.20*.

Kiwi Dollar

* Target calculations: 1.16 + ( 1.16 – 1.12 ) = 1.20

Bellwether Fedex suggests improving economy

Bellwether transport stock Fedex displays a healthy primary up-trend on the monthly chart, suggesting that economic activity is improving. Bearish divergence on 13-week Twiggs Money Flow warns of selling pressure at the 2007 high of $120; reversal below zero would indicate a reversal, while a trough above the zero line would signal a primary up-trend. Breakout above $120 would offer a target of $130*.

Fedex

* Target calculation: 120 + ( 120 – 110 ) = 130

Interest on Reserves, Settlement, and the Effectiveness of Monetary Policy

Joshua R. Hendrickson suggests that paying interest on excess reserves at the Fed reduces the effectiveness of monetary policy. Money paid to purchase Treasuries finds its way back to the Fed in the form of excess reserves. Here is the abstract from his paper:

Over the last several years, the Federal Reserve has conducted a series of large scale asset purchases. The effectiveness of these purchases is dependent on the monetary transmission mechanism. Federal Reserve chairman Ben Bernanke has argued that large scale assets purchase are effective because they induce portfolio reallocations that ultimately lead to changes in economic activity. Despite these claims, a large fraction of the expansion of the monetary base is held as excess reserves by commercial banks. Concurrent with the large scale asset purchases, the Federal Reserve began paying interest on reserves and enacted changes in its Payment System Risk policy that have effectively made reserves and interest-bearing assets perfect substitutes. This paper demonstrates that these policy changes have had statistically and economically significant effects on the demand for reserves and simply that the effectiveness of conventional monetary policy has been significantly weakened.

Read the entire paper at Interest on Reserves, Settlement, and the Effectiveness of Monetary Policy |
Joshua R. Hendrickson
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TSX meets resistance

Canada’s TSX Composite index also displays tall shadows on last week’s candle, indicating short-term selling pressure. Follow-through below 12700 would suggest another test of primary support at 12400. Reversal of 13-week Twiggs Money Flow below zero would warn of long-term selling pressure, while a trough above the zero line would again suggest a primary up-trend. Breakout above 12900 is unlikely at present, but would confirm.

TSX Composite

* Target calculation: 12900 + ( 12900 – 11900 ) = 13900