EURO: Breakout or Failure?

Investors are holding their breath, as world stocks continue the slide initiated at the beginning of August. Weaker economic prospective, along with cyclical components, are keeping the world indexes below the benchmark of profitability.  So, money is again flowing inside the safe heaven nests such as the Swiss Franc and eventually the U. S. Dollar. The Euro is at key resistance levels against the U.S dollar. Failure to breakout could take the price back to 1.41.

Stocks: Bull market ended in 2000

Investors are holding their breath, as the stock indexes are once again falling from the top. Milder than expected economic activity, coupled with an immense debt, are contracting the U.S. economy. Global growth is pausing and market correction could be a prelude to recession or to important economic slowdown. In China, the PMI was below the 50 benchmark in June and July. These movements should be the norm not the exception in current economic cycle. The long lasting trends of the 90′ are over. Stock markets (economy) are experiencing a long period of consolidation (bear?) that started in 2000. It could last 14/17 years from top to bottom. Within these lateral oscillations, the market could top/bottom roughly every 4/5 years.

In reality, incertitude in the financial market could spread into consumer confidence and limit growth. The University of Michigan’s consumer report index has fallen to the lowest level of the past 30 years. Nonetheless, industrial production increased 0.9% month to month in July, the best move since December, and capacity utilization rose by 0.9%. Leading indicators rose 5.4% in the second quarter from the previous year. So, what is going on? The job market remains weak, despite the economic recovery. Housing (American dream) is still near the bottom. Housing starts declined 1.5% month to month in July, after rising 10.8% in June. The measures implemented to face the government debt problems have been too weak. Any proposal to contract the debt becomes a battlefield between the Democrats and Republicans toward the next political elections.


Europe: Few good willing nations better than many?

In Europe, the economic picture is deteriorating, as key economies are facing the world’s slowdown. German growth has been only 0.5% in the second quarter of the year, while France output showed no improvement at all. Italy and Spain have benefited from the emergency bond purchase programme, but their economy remains weak. In Spain, domestic demand is absent and unemployment is above 20%. The housing market is lacklustre pressured by the vast amount of inventories. Only the export sector is supportive, but it is only a part of Spanish economy. Leading European nations would prefer not providing more aid to needing nations. However, the consequence might be painful. In the second quarter of the year, the Gross Domestic Product in Europe has been only 0.2% quarter to quarter (Eurostat flash estimate), below the expectations and the increase of 0.8% in the first quarter. The industrial sector in particular seems to have picked already and will possibly continue to decline along with the downtrend of the global economy.

Under these conditions, the European Central Bank should keep interest low in the coming months.  It is known structural challenges have not been addressed yet. They won’t be in the future as well without a centralized authority that coordinates fiscal policies. The meeting of Mrs. Merkel and Mr. Sarkozy last week confirmed that no important decisions can be taken while 17 members are targeting their own particular agenda. Reforms are necessary and time is beginning the shrink. At the end, France and Germany have agreed to pursue an equal corporate rate of 26%. Other European countries are invited to join in. Who will take the ball? Europe will not wait forever. Actions might be implemented before it is too late.  Fewer cohesive members could do better than 17 freelance players.

Euro: Trend is still up, but key resistance must be overcome

The Euro/USD has reached key levels at 1.45/1.46. They are at the conjunction of various resistance lines. The trend is still supportive, as well as seasonal conditions. September is one of the best months for the Euro. However, failure to break above the higher Bollinger bands at 1.4650 on the daily chart could quickly take the price again to 1.41, eventually 1.39.  A move above 1.4660 would instead target 1.4770 and possibly 1.50.

Written by Angelo Airaghi,


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