Better Trader

+27% Dax Shrugs ECB

By Ashraf Laidi

Euro sells off on a combination of downward revisions in growth and inflation as well as Draghi’s indication that discussions over interest rates remained ongoing. The possibility for the refinancing rate to reach 0.25% without the OMT having been deployed would be deemed excessive accommodation from the ECB in the face of a reticent Spain.

ECB downgrades 2012 GDP to -0.6% to -0.4% (from previous -0.6% to -0.2%) and 2013 GDP to -0.9% to 0.3%. Inflation in 2013 shall remain contained at 1.1% to 2.1%

OMT’s Durable Impact

The OMT program announcement was aimed at enabling Spain to request a bailout, but it could well end up eliminating such an event thanks to the stabilising environment created by the September announcement. The positive impact of the OMT announcement on risk metrics has been impressive to say the least:

1.     Peripheral sovereign bond yields have fallen 25-30% from their August highs.

2.     The Nov rebound in peripheral bond yields prompted by the post-Obama global market selloff proved relatively short-lived compared to the decline in global equities -8% in equities, -15% in 10-yr yields, -11% in oil and -6% in gold.

3.     Even the euro’s November selloff  paled in comparison to equities, with a 3% decline from its Oct highs in contrast to a 6% fall in the S&P500.

As the next episode of risk aversion re-emerges, Eurozone markets (periphery bonds & currency) are no longer necessarily fair game thanks to Draghi’s backstop. Even if the OMT is contingent upon another country’s decision to request aid, there is always the LTRO option, which could be adjusted via duration (rumours the next one could be five years) according to the required intensity. At a time when even Troika recognized the adverse global macro picture to be a factor in Greece’s difficulty to meet its debt targets, there are always additional tools for the ECB to use in order to contain contagion (OMT, LTRO & rate cut).

German Dax +27% YTD, New year highs & Golden Cross

Germany defies gravity as the Dax outperforms G7 peers with a 27%  rise YTD (US S&P+10%, UK +6%, Japan  +13%, HK +21%, France +14%, Spain -8%, Italy +8%). Dax performance is matched by only India’s Sensex, which is also +27% YTD.

The index has not only broken a trend line resistance extending from 2007, but also undergoes a Golden Cross, whereby the 55-week moving average crosses above the 100-week moving average for the second time in four years.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index

Is France’s Downgrade by Moody’s Already Priced into the Cac 40?

By Kathryn James

The markets still appear to be digesting last week’s downgrade of France by Moody’swith a pinch of salt. Although instant negative price action hasn’t hit France’s main index the Cac 40, I have observed that media interest in France’s economy is on the uptickand more articles are hitting the headlines as the subject of economic uncertainty in France begins to gather force (see this article  from the Economist).

The following chart is an overlay of the Dax versus the Cac which shows the Cac has underperformed the Dax throughout 2012. The Cac has retraced 61.8% of the 2011 decline compared to the Dax’s almost 100% Fibonacci retracement. In September the Dax measured a high of 7478, fairly close to the 7600 highs made in quarter two 2011. The spread between the two major European indices could be signalling that a disconnect in Europe is still at large and a surreptitious pricing of the Moody’s downgrade may have already occurred.

 

Since the 2011 lows the weekly Cac chart has made a series of constructively bullish higher lows but as yet has failed to break above the 3600 high made in March this year. The triangle pattern remains intact and 3600 is clearly the Cac bulls biggest resistance to overcome.

 

On the Daily chart the Cac has made steady progress from the June lows but has remained in a sideways consolidation phase since August. The daily uptrend is still intact but I’m closely watching the flag-like consolidation pattern for indications of the next direction. 3600 is close to the high end of this flag and as a significant resistance level a clean break with a sustained hold above could trigger a big rally that targets 4000. On the flipside if weakness hits the tape from here, a break of the uptrend followed by a break of the flag support around 3350 (with a close eye on 3300 as support) could mean a test of the June lows is possible.

 

To summarize, it seems the Economist and a few others media forces may have started the ball rolling on France and while this may well settle down - should market peace and goodwill return - it’s worth noting that further developments to this tale may excerpt influence on the Cac’s ability to break through 3600 and limit further upside potential. The Cac is stuck in a trading range, so a break of support or resistance in either direction should present a tradeable opportunity in the near future.

A Long Cold Winter Ahead for the Dax

By Kathryn James

The markets seem critically placed at this moment in time. Technically some big numbers have been taken out - S&P 1400, Nasdaq 3000 and with relative ease and the Dow has sliced through 13,000 adding a drop of over 1000 points since the highs in September. The usually volatile month of October, although a little late in starting, did not fail to deliver a dose of gloom to the bulls.

The daily chart shows how this week has been technically bearish for the Dax. At the start of the week the uptrend from the June lows was broken, then the breakdown from a usually bullish rectangle pattern followed, highlighting the underlying weakness of the market with the failure of bullish follow through. The final alarm bell has been sounded today with a break of 7000 support and as I write this the Dax is fighting to maintain a level starting with ‘7’. Incidentally 7000 was broken to the upside during the build-up and hype of the QE3 announcement, perhaps the bull’s last stand in a market of hope and highly priced expectations.

 

Many are blaming Sandy for the Dows fast track to 12,500 and there’s the election, fiscal cliff, Israel and so on but Europe still faces its own bubbling economic problems as well. The Euro crisis is still at large and for the first time in three years the Eurozone has fallen back into recession. A following comparison chart shows how far the Dow has stretched from the Dax in the last few weeks.  I’m leaning towards the Dax catching up rather than the Dow springing back and with the risk of further downside before a rally in the Dow, a pair trade may not prove fruitful. So it’s not without reason that the Dax could likely play catch up to the US and set its sights on 6400 in the near future.

 

Election Scenario Analysis of the Markets

By Ashraf Laidi

We avoid making simplistic if-then scenario analysis on the US elections for US equities, solely based on the notion that a Democrat president is negative for stocks and a Republican victory is a positive due the presence of three major elements:

1) Potentially positive market implications of Obama keeping pro-QE Bernanke, likely offsetting classical partisan implications for equities.

2) Implications of Romney threatening trade war retaliation with China as a consequence of labelling Beijing as a currency manipulator (which is a USD negative).

3) Interaction between the new White House and Congressional balance of power and its impact on averting the Fiscal Cliff.

The least ambiguous scenario analysis from the US presidential elections is that a Romney victory would be deemed a negative for gold and metals due to the Governor’s plan not to re-appoint Fed Chairman Bernanke when his term expires in January 2014. Considering Fed Chairman Bernanke’s explicit support for ongoing quantitative easing, which could extend into mid 2014 (until unemployment drops below 7.0%), removing Bernanke and his dovish supporters would likely sustain serious damage to gold and possibly boost the US dollar (in the event that Romney does not push China into a trade retaliation to his labelling them as currency manipulators).

If Romney threatens a trade action with China, as did Bush in February 2002 with his trade war on foreign steel, it would be a de-facto negative for the US currency. Recall that February 2002 marked the top of the US dollar despite prevailing so-called ‘strong dollar policy’ by Treasury Secretary O’Neill.

The implications for metals are especially magnified by the threat of the potential fiscal cliff; the combined expiration of the Bush era tax cuts; and across-the-board spending cuts in the event that Congress takes no action to avert it by end of year. Both of the spending cuts and the removal of the Bush tax cuts are expected to remove $607 billion from the US economy, or 4-5% of total GDP. Such a bite from the world’s biggest economy is estimated to drag down growth to 1.0% in the first half, before possibly printing a 2.0% contraction in the first quarter.

The above is magnified by the possibility that Romney could well ask Bernanke to resign instead of waiting until January 2014.

Aside from the Presidential race, the balance of power in Congress could also be crucial. A Congressional status quo (Democrat-led Senate and Republican-led House of Representatives), combined with a Romney victory may reduce the odds of the fiscal cliff but is likely to ease the way for a Bernanke ouster.

The worst case scenario for gold and metals would then be a Romney victory with no change in the House and the loss of further Republican seats in the Senate but without the Republicans gaining more seats in the Chamber.

The combination of a Romney victory and persistent budgetary stalemate in Congress would have a negative knee-jerk reaction throughout the metals complex. Gold has already lost half of the gains accumulated this summer. It could lose a lot more this quarter, and risk testing the $1600 territory.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index

Dax Update: Support and Resistance Examined as Consolidation Continues

By Kathryn James

Since my Dax update a few weeks ago (link:http://www.bettertrader.co.uk/blog/2012/09/dax-shows-early-signs-of-uptrend-fatigue.html) the Dax 30 has remained resolutely within the consolidation boundaries of 7100support and 7500 resistance. I have rounded the support and resistance numbers to the nearest whole number as the markets lack of short term direction could prove tricky and hunt stops around these levels. This range of consolidation could stretch even further to 7000 - which will provide good psychological support and 7600- which is the previous high from May 2011. So what we have is a range bound Dax, currently trading towards the top end of the zone at 7420, but still below the highs of 7478 put in on 21st September. A break on either side of the stretched zone at 7000 and 7600 should pre-empt the next directional trend move.

 

On the daily chart, when the Dax broke 7300, 7100 was a potential target, but this failed to occur and the Dax bounced from a low of 7182 last week. However, the steeper uptrend from the July lows has now broken, so a pullback to the uptrend support from the June lows is still a possibility. This now stands at 7000 and is worth watching as the sideways consolidation draws the price closer to the rising trend line. Should the Dax break 7600 to the upside, this would be significantly bullish as it would mark a new high not seen since January 2008 when the breakdown of the financial crisis was just beginning.

I’ll leave you with a monthly chart image of where the Dax currently sits in context against the bigger picture presented over the last decade.

 

Dax Shows Early Signs of Uptrend Fatigue

By Kathryn James

I’ve been watching the Dax 30 closely for signs of uptrend fatigue over the last few weeks - following early warning signs from Crude Oil’s recent declines mentioned in my post last week (see post). 

On a shorter term hourly time-frame (see chart below) the first warning shots of waning bullish momentum were fired last week. The Dax gapped higher then lower over a few days and then went on to make a new high of 7478 by the end of the week. This week that new high failed to hold. The Dax gapped lower yesterday in a classic sign that the summer bull trend is possibly faltering and attempting to shake out a few weaker long positions. Support at 7300 is being tested today, if it fails to hold then a pullback to test support at 7100 is likely.

 

On the daily chart, the Dax still remains within the steeper uptrend from the July lows, but a target of 7100 would mean an imminent break of this supportline and subsequent selling pressure likely. If this does happen then traders should watch for signs of support from the less steep uptrend from the June lows (see chart below).

 

The early technical warning signals of further weakness ahead have been gaining traction over the last few weeks; however the Dax could comfortably pullback to 6900 and still remain within the bullish uptrend from the June lows. 7600 above offers resistance from the high made back in May 2011, new highs above this level would be technically bullish for the Dax.

What Next For US and European Markets

By Spreadbet Magazine

 

With the FTSE All share, Dow Industrials and S&P 500 all either close to or at 52 week highs and the U.S market showing very strong gains for year to date (S&P 500 up 16.5%), the big question is, how much further do markets have to go this year?

As the previous post on the blog has said, with the Federal Reserve unveiling and effectively “open ended” QE3, and with the Eurozone debt crisis seemingly in retreat for now following the European Central Bank’s intervention, the sense of optimism seems palpable. The bulls are in the driving seat…

In early September, Mario Draghi, President of the European Central Bank (ECB) said the bank would purchase unlimited government bonds from Eurozone members at their request with the overall objective of preserving the Euro. On September 12, the German constitutional court dismissed a complaint filed by 37,000 Germans arguing that the establishment of the European Stability Mechanism (ESM) was against the country’s constitution and so ensuring that Draghi’s intervention methods remain and preserving the mantra that the ECB “would do whatever it takes” to preserve the euro.

The major indices may have further to go but perhaps not too much further, with some major technical hurdles to cross, particularly in the US market.  With institutional investors showing big gains in S&P 500 stocks, the temptation may to bank some profits in the short term on this stimulus induced rally in the North American market and redeploy it elsewhere. If further progress can be made in Europe on tackling the overwhelming issue of sovereign debt, gains in European stocks may be more likely, but much depends on Spain in the short term.

Spain’s continued issues caused by the bursting of the property bubble haven’t gone away and its leadership continues to avoid asking for help from the ECB, partly because Spanish bond yields have moved sharply into reverse (5.8% compared with 7.6% in July) in recent weeks but also to avoid a politically uncomfortable bail out. In order to accept money from the ECB,  Spain would need to agree to accept strict policy conditions, in essence, further austerity measures and oversight by the European Commission, ECB and IMF.

The bears may be in hibernation for now, but perhaps the eurozone debt crisis hasn’t been confined to history just yet. I for one am not making oversize bets that’s the markets will continue their run of recent weeks, especially in the US. Steady as she goes, as far as I can see in big caps, but riskier assets may well now catch up, so expect some action in the small cap sector in particular.

Research provided by Spreadbet Magazine

Macro Metrics of​ German Panic Point​

By Ashraf Laidi

The chart below suggests the likely time of “concern” by German equities (a loss of at least 10%) may emerge when:

1. Both German manufacturing and services PMIs have shown at least 3 months of sub-50 readings,
2. ZEW current index drops below 10.0;
3. The IFO business climate index drops below 100.0

Given the current positioning of these variables, such a time could take part in early Q4.

Hours after Moody’s downgraded its credit outlook for Germany, German July manufacturing PMI hit a fresh 3-year low at 43.3, posting its 4th monthly contraction (sub-50). Germany’s July services PMI fell to 49.7, posting its 2nd monthly contraction. Notably, the figure matches the 49.7 reached in Sep 2011-right before the Fed’s Operation Twist was delivered, followed by the ECB’s LRO in December.

Germany’s fiscal resilience is the latest variable being added into the European debt equation after Moody’s outlook downgrade for Germany, Luxembourg and the Netherlands implied the possibility of an actual downgrade by next summer… at least in theory. But if the pace of macroeconomic deterioration maintains its rapid pace, then an actual downgrade of AAA Germany may come in earlier than next summer.

A Spanish downgrade to junk status may become the next speculation point, which is seen synonymous to a 2nd bailout. The increasing reliance on the EFSF/ESM is likely to exacerbate the sovereign’s debt burden as the autonomous regions line up for more assistance from the €14 bn bailout fund. Another downgrade to Spain (possibly due in October) maybe well be the next market-punishing event, as paper of the Eurozone’s 4th largest nation in the Eurozone may no longer be accepted as collateral by the ECB.

Meanwhile in the Netherlands, negotiations among the various political parties to cut the budget by € 17 bn see no progress. The cuts will require a rise in the VAT, a freeze in public sector pay and cuts in health and development budgets.  All parties have and their constituents favour smaller budget cuts than those stipulated by the European Union.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index​

Sovereign & Priv​ate​

By Ashraf Laidi

Days after Spain pushed its €65bn austerity package through parliament, the Bank of Spain’s latest growth forecasts remind of the possibility that recession will remain until 2014.  The €65 bn package includes salary cuts of up to 7% and a three-point rise in VAT to 21%.
It may no longer matter for Spanish aid to bypass state books and onto ailing banks when deepening signs of economic contraction are joined by harsh austerity measures.
The Troika was able to capture the imagination of the market by directing funds to Spanish banks without raising the sovereign debt burden. But as the autonomous regions seek bailouts from Madrid (Valencia request for aid may be followed by at least 3 other regions) and contracting GDP complicates the meeting of debt/GDP targets, the burden would have to end up hitting the sovereign books.

€100 bn has already been committed to the recapitalization of banks, the first €30 bn. of which shall be disbursed by month-end. Spain’s autonomous regions are increasingly seeking help from an €18bn emergency-loan fund designed for these regions.

Spain’s Economy Minister Luis de Guindos says his country will "absolutely not" need a full scale bail-out as pivate economists mention amounts as much as €300-400 bn. for a 2nd Spain bailout.
Magnifying the selloff in Eurozone equities is the short-selling ban of Italian financial stocks. Dax lost 3% to break below its 100 WMA, facing the next key support at 6230. Yet, the key support level for the German index remains at 5940, which is the 200-WMA, last broken in January. Spain’s IBEX-35 was supported by late short-covering to end down 1.10% at 6,177, after touching a new 9-year low of 5905. Italy’s MIB closes down 2.8% at 12706, narrowly avoiding a fresh 3-year low.

Gold’s safe haven allure erodes each day, proving it’s increasingly dependent on the prospects of further central bank stimulus. Gold is trading at 1578, nearing its 100-week moving average (now at 1555). This technical level was last broken in December 2008. Gold has had 3 failed attempts to break below its 100-WMA this year. 1555 will be the level to watch for gold bugs.
Best

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index​

Dax Confluence &​ Gold/Oil Ratio

By Ashraf Laidi

Our July 3 piece “Why Gold & Oil Point to Higher Equities?” made the case for further gains in the major stock indices on the rationale that a decline in gold relative to oil prices paves the way for an improvement in risk appetite (more favourable for energy prices than for metals). Since then, Gold/Oil Brent ratio has declined 7% and major equity indices are 2-3% higher after an interim decline in July 5-9.

We explained that a rising Gold/Oil Brent ratio reflects the declining value of oil, resulting from weaker demand/global growth conditions. Conversely, a falling G/Brent ratio reflects the proportional stabilization in oil, which is usually accompanied by a rise in risk metrics, such as equities and energy currencies.

Shifting to equities and their technicals, Germany’s Dax-30 is up 13% from its June 5th low. More importantly, it broke above the important levels of 6575-6585, presented by the 100 day and 100 week moving averages. The mid-point of 6580 is the overlap of both of these important averages. Such overlap is known as a level of confluence—an important property in technical analysis. The fact that the Dax has risen 100 pts above this level, may allow for further gains, with 6895 in focus.

If we anticipate further declines in the Gold/Brent from its current 15 towards 13.50s, then further run-ups in equities may be in store. 7000 on the Dax may be a possibility as a 0.75% LTRO becomes increasingly likely at the same time that the probability of a Fed QE3 remains on the ascent.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index​