Important issues remain unresolved in the U.S. and in Europe, as the economic contraction is underway. Weakness is confirmed by the change of market momentum. The commodity currencies and stock indexes are meeting important tops. The euro could be shortly under fire, if key resistance levels are not overcome.
Fed is searching for solutions.
The economic contraction is underway and important issues are far from being resolved. Time is requested for the current economic cycle to unfold. So, on September 20/21, the Federal Reserve will meet again to evaluate the economic situation and try to find different solutions to recurring problems. Quantitative easing is possible, but not probable, if the Fed’s main goal is to support price stability and employment. As a result, unconventional measures, such as buying long term bonds supported by the book of short term interest rates, are in the cards.
If implemented, the “Operation Twist”, how it has been nicknamed in the 60′, would try to revitalize investment and employment throughout the implementation of negative real interest rates. Will it succeed? Time will tell it. Nonetheless, the risk of default in Europe and other economic challenges will resurface more sooner than later. In fact, household debit stays high, along with the unemployment rate, while housing is still below water.
Commodity currencies are at key levels.
Following the negative August numbers, initial job claims increased to 428,000 in the week ending September 10. Inflation was hot as well in August, 3.8%, despite the decline of crude oil prices. As a result, household wealth is thin and consumption mild. June and July retail sale estimates have been decreased. On the contrary, industrial production rose again in August, after June and July gains. The global trade is resilient and is still trending for now.
A weaker economic scenario is reflected in key market indicators. The technical patterns of the commodity currencies, such as the Australian dollar, are pointing to the downside. Gold might have found a good psychological resistance at present levels. A move above 1980 is necessary to reinvigorate the long term uptrend. Finally, the stock indexes are still rebounding from the recent decline, but the medium trend stays on the downside. Strong resistances are met at 1230/1260 (S&P 500).
EUROPE: A giant in chains.
Europe is playing all possible cards to avoid a painful ending, but solutions are limited and time is running out. Last week, the European Central Bank (ECB) announced that from next month a total of five central banks (UK, Japan, Switzerland, Europe and U.S.) will provide for three months three lending operations to inject liquidity and restore hope. During the same period, 27 European finance ministers met instead in Poland searching for political solutions to the European crisis.
At the presence of the U.S. Treasury secretary, the European ministries showed to the world why Europe is a giant in chains. Lack of unity and common purpose is predominant. The Union is mostly a political entity without a centralized fiscal authority. Decisions are difficult to take, since they require the approval of all the members. The electorate’s mood comes first. Europe’s well being is only second.
For this reason, the solution to the Greek’s tragedy has been postponed for too long. The three cornerstones of the rescue plan of Greece: fiscal consolidation, privatization and private sector involvement have only partially been implemented. Results are unsatisfactory. The Greek’s Ministry of Finance anticipated the GDP could fell 5% in 2011. However, the reality might be worse. The government is trying to catch up with the lost time. Taxes will be collected through various sources. As an example, negotiations are underway with ship owners, who have benefited from tax exemptions so far. Nonetheless, it might be too late. The financial markets are adopting a “wait and see” stance for now. The Euro tried to overcome the important resistance at 1.40 without much conviction. Failure to close above 1.4140 could increase selling pressure and take the price to 1.35 and eventually 1.32.
Unity is strength. Fiscal federalism is the key for Europe. The ball is now in the government field. Will Europe become a fiscal union as well? Few steps are about to be implemented. The revision of the European Financial Stability Facility (EFSF) is underway and the process could end at the beginning of next year. If approved, the EFSF would provide greater flexibility on responding to extremes situations by supporting the banking sector with capital or by buying bonds in the secondary market. In addition, the lending disposal will be of more than Euro 400 billion. Maybe, it is just a drop in the ocean. The default of Greece will bring consequences to the other European countries. Portugal, Ireland, Spain, Italy, France and Belgium will all be somehow affected. Europe has the capacity to survive the crisis. Opportunities will then arise. However, the healing process might take a long time. European leaders will have to manage the period of transition, along with the ECB. Will they think European? A slip back into the past would be the real catastrophe.
Angelo Airaghi, www.ProfitsOn.com
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