For Chancellor Angela Merkel it must have felt like a sweet victory, when the majority of the German parliament approved the revised European Financial Stability Facility last week.
After months of struggle, and a few administrative elections lost by her party, the C.D.U., there is some good news for the east born German. Being a politician is not an easy job in current complex and fragmented world. So, each tiny step taken in the right direction should be celebrated, knowing the momentum could be short lived.
In effect, problems remain unresolved. Greece might run out of money by the end of October. The economic cycles are still pointing down. The U.S. 10 year note futures are currently at the highest level since 2008. What could stocks do?
A journey of a thousand miles begins….
It was a tiny step in the right direction Bundestag approval of a new EFSF last week. Among other things, the fund will allow buying sovereign bonds and recapitalize weak banks. After Germany, it will be the turn of Malta, the Netherland and Slovakia for the ratification process to be completed by mid October. Other aspects will be discussed during the European summit in Cannes (France) on November 3 and 4.
If fully approved, the EFSF could be considered a victory of Angela Merkel. Nonetheless, the exposure to the European cause might have cost her the next political elections. The opposition party, the C.S.U., which is leading the pools so far, opposes any further aid to Greece. Will the new treaty work? An improved EFSF alone will not be enough to save Europe from its own problems. Other initiatives should be brought to the table, such as the implementation of a centralized fiscal authority.
It is a titanic work for a slow-moving Europe. By the end of October, Greece could run out of money and might again receive a new set of funding. What will happen next? Postponing a decision on Greece could have the only effect to prepare Europeans for the worst, hoping to find a better solution down the road.
In the mean time, the global economic contraction is hitting and the E.C.B is expected to cut rates again by the end of the year. Currently, the euro is meeting various levels of supports against the U.S. dollar. The medium-term trend is bearish, until the price stays below 1.3990. However, bad news might start to be discounted at current prices.
In effect, after the PMI and the ZEW, also the German’s IFO survey index declined for the third time in a row in September. Unemployment fell instead to the lowest level since 1991. Nonetheless, numbers should worsen in the future, since employment reacts with a lag to the economic trends.
Will Washington act quicker than Brussels?
Financial markets move from periods of calmness to periods of volatility. Like living creatures, they breathe in and out in a cyclical rhythm. Last week, it was YIN again. Good news has finally emerged, after a period cloudy business. Initial claims had declined to the lowest level since April 2011. Durable goods orders, both new and shipments, were positive. Business investment was trending. In reality, the unemployment rate stays high. Housing is still underwater, despite prices designing a bottom at current levels.
So, households’ are hoping the Congress will soon approve President’s Obama support measures: extended unemployment benefits and payroll tax cuts. With Europe straggling and China cooling, the U.S. are resiliently fighting the tide. Will it last? Foreseen the future is a challenging art. However, economic cycles might not have completed their trajectories yet. Commodity currencies are still point to the downside. Stocks could decline further before resuming the uptrend. Finally, notes yields just hit the lowest long term trendline (26 years), for the first time since 2008.
Stocks and notes (bonds) yields seem to have common denominator: they tend to move away from each other. A decline of the former could be followed (anticipated) by an increase of the latter. Extremes are important, as they might determine a change in direction. What is the relationship now? The U.S. 10 year note futures (futures prices rise, as yields decline) have reached the 26 year’s resistance line. In the past, this pattern has been an indicator of stock trends. In fact, for 3 times out of 5, stocks have shown the tendency to bottom within 10 months (10, 6, 3) after bonds hit the upper line. The past does not guarantee future results. However, reality could reveal itself sooner than later. Consumer confidence is in fact deteriorating, despite a resilient economy. Will Washington be able to act faster than Brussels?
Angelo Airaghi, www.ProfitsOn.com
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