The Dollar Index failed to confirm the primary up-trend, breaking support at 76 with a sharp fall in response to news of a resolution to the euro-zone debt crisis. Expect a test of primary support at 73. Breach of the rising trendline on 63-day Twiggs Momentum would confirm.
Expect gold and commodities to rally as a result of the weakening dollar.
Eurozone leaders are as far as ever from finding a lasting solution to the bloc’s underlying problem of economic divergence, despite their latest progress in managing the symptoms of its debt crisis……
“This is another step in the right direction, but it is not enough to get us to the end game,” said Stephane Deo, chief European economist at UBS. “It buys time but it does not address the fundamental problem of the sovereign debt crisis.”
via Eurozone debt deal tackles symptoms, not cause | Investing | Financial Post.
As Sir John Major wrote this morning in the FT, this does not solve EMU’s fundamental problem, which is the 30pc gap in competitiveness between North and South, and Germany’s colossal intra-EMU trade surplus at the expense of Club Med deficit states.
It is therefore unlikely to succeed. It means that Italy, Spain, Portugal, et al must close the gap with Germany by austerity alone, risking a Fisherite debt deflation spiral. As I have written many times, this is a destructive and intellectually incoherent policy, akin to the 1930s Gold Standard. It risks conjuring the very demons that Mrs Merkel warns against.
Sir John is less categorical, but the message is the same. Europe will have to evolve into a fiscal union to make the system work….
Finally someone dares to go ahead and say what is on everyone’s mind, namely that proclaiming a 60% “haircut” as voluntary is about the dumbest thing to ever come out of ISDA. As is well known, the ECB and the entire Eurozone are terrified of what may happen should Greek CDS be activated, and “contagion waterfall” ensue. The fear is not so much on what happens with Greece, where daily CDS variation margin has long since been satisfied so the only catalyst from a cash flow market perspective would be a formality. Where it won’t be a formality, however, is for the ECB which has been avoiding reality, and which will have to remark its entire array of Greek bonds from par to 40 cents on the dollar, which as Alex Gloy indicated earlier, will render the central bank immediately insolvent all else equal.
The unpleasant truth is that the EFSF leverage proposals are idiotic, the worst sort of financial engineering, legerdemain, and trickery.
As countless economists have pointed out, it concentrates risk. Germany’s €211bn commitment to the fund is not technically breached but the risk of suffering large and perhaps total loss is vastly increased. Creditor states switch from protected senior status on Greek, Portuguese, or Italian debt to the bottom rung on new slabs of sub-prime structured credit. The bluff might well be called.
The consequence will be to bring forward the downgrade of France and other states. It will accelerate contagion to the core, not stop it.
French President Nicolas Sarkozy said after the marathon negotiating session that the leaders had reached agreement with private banks on a “voluntary” 50% reduction of Greece’s debt in the hands of private investors.
He also said they had agreed to expand the firepower of the European Financial Stability Facility, the euro zone’s bailout vehicle, four- or five-fold—suggesting it could provide guarantees for €800 billion to €1.3 trillion of bonds issued by countries such as Spain and Italy.
The leaders also agreed on a plan that would boost the capital buffers of the stragglers among the Continent’s 70 biggest banks by €106 billion—though they didn’t say where the money would come from.
BRUSSELS—Deep divisions between euro-zone governments and private banks over how much to cut Greece’s private debts threatened to undermine efforts by European leaders to agree to a broad package at a Brussels summit Wednesday night aimed at stemming the Continent’s intensifying debt crisis.
….Governments, led by Germany, have been seeking a real cut in the value of Greek government bonds held by private investors of as much as 60%. The banks, led in negotiations by Charles Dallara of the Institute of International Finance, a Washington-based international bank lobby group, offered a new proposal Tuesday night that officials said had fallen far short of that.
Ms. Merkel, speaking in Germany’s lower house of parliament ahead of a vote on the European Financial Stability Facility, said Germany can’t prosper without Europe.
“We must solve the current crisis and correct mistakes from the past,” Ms. Merkel said, adding that she wants to push for sustainable decisions to be made at a summit of European Union government leaders later Wednesday in Brussels where leaders are expected to announce a package of measures to contain the sovereign-debt crisis.
A broad majority in the house is virtually certain to support a resolution backing a package of options to boost the firepower of the €440 billion ($611.91 billion) fund to more than €1 trillion without increasing contributing countries’ guarantees for the fund. All major parties approved the resolution in their parliamentary groups on Tuesday, making the resolution’s passing highly likely.
The 17 eurozone countries have not reached final agreement on the details of two key elements of the plan — reducing Greece’s massive debts and boosting the firepower of the bailout fund, two European officials said. They spoke on condition of anonymity because the talks were confidential.
Because of that, the 10 EU countries that do not use they euro won’t sign off on a plan to force banks across the continent to raise billion of euros in capital and insisted the meeting of finance ministers be called off, the officials said.
One of the officials said that the eurozone was also still waiting for Italy to take concrete action to control its debts and kick start growth.
“It’s a real mess once again,” the other official said.
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.
* 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.
The French CAC-40 index displays secondary buying pressure. Respect of 3700 would signal another test of primary support at 2800.
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.
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*.
* Target calculation: 16 + ( 16 – 13 ) = 19
