Europe on the mend

Germany’s DAX is holding above its new support level at 10500. Respect, with follow-through above 10800, would confirm the primary up-trend.


* Target calculation: 10500 + ( 10500 – 9500 ) = 11500

France’s CAC-40 Index is consolidating in a narrow band between 4400 and 4500. Upward breakout would suggest a primary up-trend. Follow-through above 4600, completing a broad double bottom, would confirm. Rising Twiggs Money Flow reflects buying pressure.


The Footsie retreated from resistance at 7000 but short candles and strong Twiggs Money Flow, high above zero, suggest long-term buying pressure. Expect strong resistance between 7000 and 7100. Correction to 6500 would establish a more stable base for further advances.

FTSE 100

* Target calculation: 6500 + ( 6500 – 5900 ) = 7100

The “Junckernaut” is driving Britain to inevitable separation | Telegraph

Jeremy Warner on the drive for Britain to separate from the EU:

…Yet getting out entirely doesn’t strike me as either a wise or necessary approach to the developing standoff in relations…..Jacques Delors, who whatever you might think of him remains one of the few leaders of any authority and vision to have emerged from the European quagmire, has suggested a possible way out for Britain – a sort of amicable divorce, but with extensive child visiting rights. He’s called it “privileged partnership”, with apparent access to the single market and some say in its operation. For some eurosceptics, this will not be sufficient, for it would require agreement to the four freedoms: free movement of goods, services, labour and capital…..Yet from a purely economic perspective, this looks like a good and workable solution. For the rest of Europe, the single currency is driving a process of integration which must ultimately require some form of fiscal and political union. It’s still a long way off, but it is coming, and inevitably, it places Britain in a completely different, non participant role…..

Read more at The "Junckernaut" is driving Britain to inevitable separation – Telegraph Blogs.

Bank of England throws egg all over RBA, APRA | | MacroBusiness

Of all of the financial systems in the world, Australia’s is most similar to the UK. Of all of the restrictive housing planning systems in the world, Australia’s is most similar to the UK. Of all of the house price boom and bust cycles in the world, Australia’s is most similar to the UK. The Bank of England also practices inflation targeting though its cap is 2%. The UK and Australia share a similar economic model reliant upon external borrowing to fund consumption and low export-to-GDP ratios but the main difference is that the UK economy is a more diverse mix of value-adding sectors with a much higher contribution from manufacturing.

But today there is one very new difference. The UK has announced it will henceforth practice macroprudential regulation to control its housing cycles and prevent them from hollowing out the economy…..

Read more at Bank of England throws egg all over RBA, APRA | | MacroBusiness.

Strong UK manufacturing rebound continues | Markit

From Markit Economics, released February 3rd, 2014:

The strong upturn in manufacturing production was maintained in January, as companies scaled up output in response to stronger inflows of new orders. There were reports of improved demand from the domestic market and rising levels of new business from overseas…..

Read more at Markit/CIPS UK Manufacturing PMI: Strong UK manufacturing rebound continues.

U.K. Aims to Mute Impact of Crisis –

Chancellor of the Exchequer George Osborne and Bank of England Gov. Mervyn King announced plans to flood banks with cheap funds in a dual attempt to jump-start lending to British households and businesses and to fend off potential financial problems at big U.K. lenders. The programs resemble some of the emergency measures enacted by central banks in Europe and the U.S. during peak crisis periods in recent years.

via U.K. Aims to Mute Impact of Crisis –

Cameron’s Rejection of EU Summit Isolates Britain

“There is now little point in Britain staying in the EU,” said MacShane, who was a minister in Tony Blair’s generally pro-Europe Labour Party government. “It is an historic turning point and Britain might as well get out now, as Europe’s future will be settled without us.”

…….The economic impact of leaving the European Union would be difficult to predict. British companies might lose easy access to European markets — where they now enjoy open trade, with few barriers — but Britain also might be able to negotiate a favorable trade treaty with Europe, as Israel and Mexico have done.

via Cameron’s Rejection of EU Summit Isolates Britain.

Comment: ~ Withdrawal from the EU could harm the same financial sector that David Cameron has vowed to protect. The UK may view tighter financial regulation and/or transaction taxes imposed by the EU as a threat, but interruption to trade/financial flows posed by isolation from the EU would be an even greater danger.

BBC News – David Cameron defends decision to block EU-wide treaty

Having failed to reach an agreement of all 27 EU members, the 17 eurozone countries and the other EU states apart from the UK are expected to sign up to the new deal, which includes:

• a commitment to “balanced budgets” for eurozone countries- defined as a structural deficit no greater than 0.5% of gross domestic product – to be written into national constitutions

• automatic sanctions for any eurozone country whose deficit exceeds 3% of GDP

• a requirement to submit their national budgets to the European Commission, which will have the power to request that they be revised

Mr Cameron said the abandoned treaty change involving all 27 members had been in danger of “distorting the single market”.

“I think I did the right thing for Britain,” he said. “We were offered a treaty that didn’t have proper safeguards for Britain and I decided it was not right to sign that treaty.”

via BBC News – David Cameron defends decision to block EU-wide treaty.

EU Treaty Takes Shape –

[European Union] leaders, who are still deeply divided over key elements of their crisis strategy, decided they would move to form a pact among at least 23 of the members to tighten rules on national fiscal policy.

But details of the proposed treaty remained to be settled. The U.K. stood aside—after Prime Minister David Cameron failed with what officials said was a “shopping list of demands” designed among other things to protect national supervision of its banks—while Hungary, Sweden and the Czech Republic reserved their positions.

“We will achieve the new fiscal union. We will have a euro currency within a stable union,” German Chancellor Angela Merkel said at the end of the meeting. “We will have stronger budget deficit regulations for euro-zone members.”

via EU Treaty Takes Shape –

Buiter: no politically feasible route to sustained growth for many years to come | Credit Writedowns

Citigroup chief economist Willem Buiter:

There really is no politically feasible route back to sustained economic growth through monetary and/or demand stimulating policies for the EA, the UK, the US and Japan, for many years to come. As regards demand stimulus, expansionary fiscal policy will not be punished by the markets to the point of being self-defeating for all EA member states except for Germany (which will not do it on any significant scale for domestic political reasons). The US also may be technically able to use fiscal expansion to stimulate demand, but even if markets continue to be tolerant, political gridlock makes it impossible. Expansionary monetary policy is at the end of its rope in the US and Japan. The UK could cut the official policy rate by 50 bps and the ECB by 125 bps, and then they too are restricted to quantitative easing (QE), which I consider to be ineffective.

via Buiter: no politically feasible route to sustained growth for many years to come | Credit Writedowns.

U.K. Seeks to Revive Growth –

[Treasury chief George Osborne] will also announce an extra £30 billion in new money to be spent on infrastructure such as railways, roads, classrooms and broadband connections, said a person familiar with the matter. Of this, £20 billion will be provided by pension funds. The Treasury has signed a memorandum of understanding with the National Association of Pension Funds to provide this cash. Another £5 billion will come out of savings in other government departments and be spent over the next four years. The other £5 billion will be spent after 2015, but plans will be set out now.

via U.K. Seeks to Revive Growth –

David Cameron: our plan to cut debt is failing – Telegraph

The Prime Minister on Monday conceded that tackling Britain’s debts was “proving harder than anyone envisaged”, raising the prospect that the Coalition would be unable to close the deficit by 2014-15……Debt is “a drag on growth”, Mr Cameron told business leaders. “We are well behind where we need to be,” he said.

via David Cameron: our plan to cut debt is failing – Telegraph.

The Wages of Economic Ignorance – Robert Skidelsky – Project Syndicate

Despite austerity, the forecast of this year’s UK structural deficit has increased from 6.5% to 8% – requiring an extra £22 billion ($34.6 billion) in cuts a year. Prime Minister David Cameron and Chancellor George Osborne blame the eurozone crisis; in fact, their own economic illiteracy is to blame. Unfortunately for all of us, the explanation bears repeating nowadays. Depressions, recessions, contractions – call them what you will – occur because the private-sector spends less than it did previously. This means that its income falls, because spending by one firm or household is income for another.

In this situation, government deficits rise naturally, as tax revenues decline and spending on unemployment insurance and other benefits rises. These “automatic stabilizers” plug part of the private-sector spending gap. But if the government starts reducing its own deficit before private-sector spending recovers, the net result will be a further decline in total spending, and hence in total income, causing the government’s deficit to widen, rather than narrow. True, if governments stop spending altogether, deficits will eventually fall to zero. People will starve to death in the interim, but the budget will be balanced.

via The Wages of Economic Ignorance – Robert Skidelsky – Project Syndicate.

Europe: breach of medium-term support would signal decline

Italy’s MIB index is testing medium-term support at 15000 on the weekly chart. Failure — and respect of the descending trendline — would warn of another decline, with a target of 9000*. Breach of primary support at 13000 would confirm.


* Target calculation: 13 − ( 17 − 13 ) = 9

France’s CAC-40 index is similarly testing support at 3000. Breach of support would warn of another decline — as would reversal of 13-week Twiggs Money Flow below zero. Failure of primary support at 2700 would offer a target of 2000*.

CAC-40 Index

* Target calculation: 2700 – ( 3400 − 2700 ) = 2000

The DAX is also testing medium-term support. Reversal below 5600 would warn of another test of primary support at 5000. Failure of 5000 would offer a target of 3600*.

DAX Index

* Target calculation: 5000 – ( 6400 − 5000 ) = 3600

Even the FTSE 100 index is testing medium-term support. 13-Week Twiggs Money Flow looks stronger than its European neighbors, but reversal below zero would warn of a further decline. Breach of medium-term support at 5350 would warn of a test of primary support at 4800.

FTSE 100 Index

* Target calculation: 4800 – ( 5600 − 4800 ) = 4000

The Anatomy of Global Economic Uncertainty – Mohamed A. El-Erian – Project Syndicate

Mohamed A. El-Erian, CEO of PIMCO, describes four key dynamics that will shape the future of the global economy:

  1. Many economies have built up excessive debt that is now causing market instability. They have three options for de-leveraging: default, like Greece; austerity, like the UK; or “financial repression” like the US — where “interest rates are forced down so that creditors, including those on modest fixed incomes, subsidize debtors”.
  2. Economic growth would reduce the ratio of debt to incomes: “Many countries, including Italy and Spain, must overcome structural barriers to competitiveness, growth, and job creation through multi-year reforms of labor markets, pensions, housing, and economic governance. Some, like the US, can combine structural reforms with short-term demand stimulus. A few, led by Germany, are reaping the benefits of years of steadfast (and underappreciated) reforms.”
  3. It is also important that the benefits of economic growth be shared across the entire community,  reducing income inequality and related social instability.
  4. Political systems in Western democracies, designed to support the status quo, are ill-equipped to deal with these “structural and secular changes”. Failure to adjust is the greatest risk.

“Those on the receiving end of these four dynamics – the vast majority of us – need not be paralyzed by uncertainty and anxiety. Instead, we can use this simple framework to monitor developments, learn from them, and adapt. Yes, there will still be volatility, unusual strains, and historically odd outcomes. But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.”

via The Anatomy of Global Economic Uncertainty – Mohamed A. El-Erian – Project Syndicate.

Youth Hit as U.K. Jobless Rate Rises –

The Office for National Statistics said its comprehensive internationally comparable measure of unemployment rose 129,000 in the three months to September to 2.62 million, the highest level since 1994. That lifted the unemployment rate to 8.3%, the highest rate since 1996, compared with 8.1% in the three months to August.

Within that figure, the number of unemployed people between 16 and 24 years old, known as youth unemployment, rose 67,000 in the three months to September to 1.02 million, a rate of 21.9%.

via Youth Hit as U.K. Jobless Rate Rises –

Europe consolidates

The FTSE Italian MIB index found support at 15000. Expect an upsurge in response to news that Mario Monti has been asked to form a new government. Breakout above 17000 would signal a rally to 19000. Rising 13-week Twiggs Money Flow indicates consistent buying pressure over the past few weeks.


* Target calculation: 17 + ( 17 – 15 ) = 19

France’s CAC-40 index similarly found support at 3000. Recovery above 3400 would offer a target of 3800, but 63-day Twiggs Momentum, a long way below zero, indicates a primary down-trend.

CAC-40 Index

* Target calculation: 2800 – ( 3400 – 2800 ) = 2200 AND 3400 + ( 3400 – 3000 ) = 3800

The German DAX found support at 5700. Recovery above 6400 would offer a target of 7100, while failure of support would warn of another test of primary support at 5000.

DAX Index

* Target calculation: 6400 + ( 6400 – 5700 ) = 7100

The FTSE 100 is also consolidating above medium-term support — this time at 5350. 13-Week Twiggs Money Flow continues to signal strong buying pressure. Breakout above 5700 would re-test the 2011 highs at 6100. Failure of support is unlikely, but would warn of another test of primary support at 4800.

FTSE 100 Index

* Target calculation: 5700 + ( 5700 – 5300 ) = 6100

We need to remember, however, that this is still a bear market. We have seen one or two favorable news headlines but very little substance. And the European economy faces strong headwinds over the next few years.