Tag Archives: ECB

Currensee Trade Leader Alex Kazmarck of SpotEuro LLC presents predictions for 2014... and things are already moving faster than anticipated...

I expect trading ranges into the New Year and the first few days of the new calendar year since most activity will being on the 6th of January since the 2nd and 3rd fall on a Thursday and Friday, not likely to be market movers without some significant catalyst.

Going into 2014, I think traders will continue to debate the US monetary policy and how new Federal Reserve Chairwoman Janet Yellen will manage the QE exit, or perhaps even stay the course (now known as the “new normal”), continuing to support the US economy if data begins to show signs of weakness. Traders will also look closely at growth in both US and Europe, with the latter being a focus of peripheral growth outside of Germany. It’s important to add that economic divergence in Europe will also put pressure on politics as well as the ECB, possibly calling for a weaker euro or a change to ECB’s mandate. Finally, Japan will also be in focus as the BOJ’s 2% inflation target may be difficult to reach and with a looming increase in sales tax from 5% to 8%, some members of the board have expressed concern in the Q3 GDP growth figures. How will the BOJ attempt to reach its inflation target without hampering growth? These are the stories that will likely drive price action during the next 12 months.

Technical Analysis

In the next few weeks, as everyone gets back to their desks and volumes begin to pick up, there are certain levels that I will be monitoring for directional purposes. Taking a look at the EUR/USD, the pair has maintained an upwards trending channel; however, it was not able to break above the 1.3820 high set in late October just before ECB surprised the market with a reduction in the benchmark interest rate. Despite the rally that followed in November and early December, I am still looking for a move lower to 1.3500 before continuing lower to the 1.30s. This view will be negated if the pair breaks higher and closes above the 1.3800 level. To the downside, this view is supported on a close below 1.3600 with next support at 1.3500 and 1.3400. A close below 1.2750 should begin a new down trend.

On the other hand, should the pair close decisively above 1.3800, I will target 1.4250 and 1.4500 as levels of resistance where the pair will likely consolidate. I don’t see much support for this view as Europe continues to lag the US in economic growth and monetary tightening. I will also point out that the current top of 1.3833 is also the 61.8% retracement from 1.4920 high in May of 2011 to the low of 1.2043 set in July of 2012.

I expect the euro to end 2014 between 1.2500 and 1.2800 with 1.20 and 1.38 as the low and high respectively.


Keeping in line with the “new normal”, I find it difficult to believe that the US economy will be able to sustain such growth in both the labor and financial markets in 2014 as it had during 2013 without continued pressure to keep yields low with its current QE purchases and force money into riskier assets. Inflation will be an important figure to watch, especially if the Fed decides to lower interest on excess reserves below zero as this should fuel banks to lend more, fueling consumption. The themes that made headlines in 2013 will continue to be the front runners in 2014 and should be followed closely.

Short term resistance – 1.3750-1.3800

Short term support – 1.3650-1.3600

Alex Kazmarck of Trade Leader SpotEuro presents analysis of the EUR/USD.


The euro has been correcting upwards following the big sell-off that occurred late in October and early November following deflationary data from Europe and the unexpected action from the ECB, which lowered its minimum bid rate. There has even been a mention of negative interest rates, which caused some volatility but most traders have brushed that news aside. Even US economic data has been more or less positive with both employment data and housing figures surprising mostly to the upside but the euro continued to climb higher, reaching the 61.8% retracement from the Oct. 25th high to the November 7th low (the fundamental change I wrote about last time). The EUR/USD pair has now been consolidating during the past 6 days and there have been convergence in both the currency and equity markets as the highs in SP500 are pointing to a top and possible upcoming correction. The most likely scenario to expect is the ECB remaining concerned about the economy and indicating that interest rates will remain low for an extended period of time. Importance will be placed on the ECB press conference and Draghi’s inference to possible negative interest rates and the deflationary economic data, not just in Europe, but even in Germany. Non-Farm Payrolls are on tap the following day and if the figures are better than expected we could see risk aversion take place as tapering of Quantitative Easing by the Federal Reserve will outweigh the positive news (equity markets will fall and the USD will act as a safe haven, along with the JPY).


The bearish analysis remains constructive as the EUR/USD pair remained below the upwards sloping trend line and below the 62.8% retracement level of the earlier mentioned drop that started in late October. While the bearish picture is intact, we must remain aware that if Non-Farm Payrolls come in weaker than expected, the markets will once again assume that tapering will be pushed further out into the future and we should expect a decline in the US dollar.

Currently, looking at a head and shoulder formation on the daily chart, with the right shoulder correlating with the 61.8% retracement mentioned earlier. A break above that level could target the 1.38 highs and we’ll have to reanalyze the situation following the ECB and NFP news.

A break below the current channel trend line and most notably below 1.3450 should target the 1.3300 pivot low. A close below that level will lead to 1.3150 and the weekly (in yellow) trend line should act as support for the time being.


Much emphasis must be placed on this ECB meeting and Draghi’s comments on how the ECB will deal with deflationary pressures within Europe. Friday’s US NFP data will also be very important as stronger employment will guide the Federal Reserve into tapering its QE program sooner rather than later. Expecting increased volatility.

In the first of many posts, Alex Kazmarck of Currensee Trade Leader SpotEuro presents his analysis of of the EUR/USD. Tune in tomorrow for John Forman's take on some of the same events.


The last two weeks have been a disaster for the euro currency as economic data from Germany and France along with Italy, Spain, and Portugal continued to underperform expectations, culminating with the ECB lowering interest rates by .25%, a move that was not expected by most economists. These developments over the past ten days have led to the euro losing 3.2% of its value against its US counterpart. The 1.3825 high in the pair’s exchange rate may now be in place, unlikely to be revisited anytime soon. Although US economic data has been mixed, the recent surprise in GDP growth and better than expected payrolls data is pointing to a fundamental shift between the ECB and the Fed, with the latter looking to tighten its monetary policy (tapering of QE) sooner rather than later.  This shift will most likely lead to a continued correction for the euro in the coming months.

There remain many obstacles for both the euro area and the United States, both suffering from poor employment and deflationary pressures. As mentioned many times by the FOMC members, the Fed is targeting a jobless rate of 6.5% before it begins to increase interest rates. While that figure has been on the decline, the participation rate has fallen to lows not seen since 1978, making it difficult to see the impact QE has had on job creation. This creates a problem in forecasting what actions the FOMC will take in the coming months and is just one example that could easily reverse market direction.

Inflation and employment will most likely be difficult to gauge, so aside from recognizing their importance, we will look at price action for guidance.


The EUR/USD found support just below 1.2800 during the latter part of 2012 and the first half of 2013, bouncing off the figure in late July and rallying 8% to set a new year high.  As we can see in the following chart, the pair retraced its first rally by 50% before continuing higher in September through the end of October. With the most recent price action being fundamental in nature, we are using this as a stepping stone to look for further downside. The weekly trend line was broken at 1.3450, which was previous support and will now act as resistance. The next level of support is now just above the 1.3150 level for the pair. While a retracement back above 1.3500 can’t be ruled out, I’m looking to sell on rallies and a break below 1.3100 should confirm the medium-term short bias. Further below is the important 1.2800 level that acted as support for 2012-2013. Should we break that figure, it will act as confirmation of a longer-term short bias and I’ll be looking for lower 1.20s as a target before looking for longer term consolidation.


Near term outlook is for a small correction to 1.3450/1.35 before a continued move lower to 1.3100 near the end of the week/month. There is a lack of economic data from Europe until Thursday at which time we’ll see preliminary GDP readings from France, Italy, and Germany, along with other data. Worse than expected figures will put downward pressure on the euro and support the loose monetary policy guidance shown by the ECB last week.

It is only a matter of weeks since a number of European leaders, including the French President Nicholas Sarkozy and Italian Prime Minister Mario Monti, declared the euro-zone crisis to be “almost over.”  Financial markets jumped to the same conclusion following the large provision of liquidity by the European Central Bank (ECB) in two large three-year long-term refinancing operations last December and late-February respectively.

The calm provided by the ECB’s unconventional liquidity facilities proved fragile however, and stress returned to the zone’s sovereign bond markets once data confirmed that economic conditions continue to deteriorate.  The contraction in economic activity is frustrating efforts to meet ambitious fiscal goals, with both Spain and Italy indicating that they will not reach the initially projected deficit targets.  The evidence confirms that the fiscal consolidation strategy is not working, and a less restrictive policy mix will ultimately be required to save the euro-zone’s troubled periphery.

The economic challenge facing the periphery is far more complex than simply reversing the large fiscal deficits and stabilising the outstanding stock of public debt relative to GDP.  The sizable external deficits that persisted in the years before turmoil struck must be eliminated in order to stabilise the level of net external liabilities as a percentage of GDP.

The average current account deficit among the periphery increased from just four per cent of GDP in 2003 to almost eleven per cent by the time the crisis struck, which caused net external liabilities to rise to more than seventy per cent of GDP in Greece, Portugal and Spain.  Meanwhile, net payments abroad averaged three per cent of GDP in Greece, Portugal and Spain by 2007, or one-quarter of the current account deficits in each country.

By 2007, external debt indicators all vastly exceeded levels that had previously triggered crises in developing countries, and continued to deteriorate in subsequent years.  The latest available data indicates that net external liabilities exceed 100 per cent of GDP in both Greece and Portugal, are close to 100 per cent in Ireland, and more than 90 per cent in Spain.  Not surprisingly, net payments abroad are capturing an ever greater share of GDP.

In order to return the external indicators to more sustainable levels and avert a balance of payments crisis, simply eliminating the current account deficits is unlikely to prove sufficient; large surpluses will be required over several years in order to paydown external debt.  However, unlike previous balance of payments crises, this task cannot be accomplished via a substantial depreciation of the exchange rate, which means that the adjustment required can only be realistically achieved in the short-term through a reduction in domestic demand.

A decline in domestic demand however, is virtually certain to lead to a contraction in economic output in those peripheral countries including Greece, Portugal, and Spain, where trade openness is relatively low.  A fall in the overall level of economic activity makes it all the more difficult to meet ambitious fiscal targets, which means that the upward pressure on borrowing costs is unlikely to abate.  In turn, the external deficit is likely to prove more difficult to finance, increasing the pressure to effect the necessary adjustment more rapidly.

Further, the ability to run a current account surplus in the troubled countries – apart from Ireland – is constrained by the de-industrialisation of these economies in the recent past.  This means that the economic structures of Greece, Portugal and Spain are such that they can be expected to run external deficits for a ‘normal’ level of domestic demand.

The bottom line is that a sizable contraction in domestic demand will be required to return external debt indicators to a more sustainable level.  The cost in terms of higher unemployment however, is a cost that the sovereigns in difficulty may not be willing to pay.  The rate of joblessness is already unacceptably high in the periphery, particularly among the young, and further declines in the numbers employed may well lead to social unrest and political upheaval.

The external position has already shown marked improvement in the euro-zone’s periphery – apart from Greece.  The current account in Ireland has been close to balance since the beginning of 2010, while the deficits in both Spain and Portugal have narrowed considerably from almost ten per cent of GDP in 2007 to below four per cent last year.  Nevertheless, despite the impressive progress, further adjustment is required and particularly so in the Iberian Peninsula where the incremental social costs may well prove to be too onerous.

The fiscal consolidation strategy currently being applied in the euro-zone’s periphery is not working, and will continue to fail so long as much-needed private sector deleveraging and a reversal of unsustainable external deficits continue to frustrate government’s best efforts.  A less restrictive policy mix will ultimately prove necessary to save the euro.

Previously posted on www.charliefell.com


Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Lawrence Peter ‘Yogi’ Berra, a man who earned the respect of American baseball fans first as player and then as manager, declared in the early 1960s that, “This is like déjà vu all over again” as two of his players – Mickey Mantle and Roger Maris – made a habit of hitting home runs game after game.  Berra’s words would appear to be an apt description of renewed stress in the euro-zone.

The euro-zone crisis seemed to ease following the large liquidity injection provided by the European Central Bank in two large three-year long-term refinancing operations, which led some commentators to conclude that the turmoil had come to an end.  Indeed, the yield on Spain’s ten-year sovereign debt dropped from a peak of almost seven per cent at the end of November to below five per cent in early March, while the rate available on equivalent Italian debt securities declined by more than 250 basis points over the same period.

The notion that the crisis was over was to prove decidedly premature, as the siesta was brought to an abrupt end by mounting stress in the Kingdom of Spain, an economy that is twice the size of the combined national outputs of Greece, Ireland and Portugal.  A deepening recession combined with fiscal slippage at the regional level pushed Spain back onto investors’ radar screens, and the resulting jump in ten-year yields close to the psychologically important six per cent level, has prompted onlookers to revisit the possibility that the Mediteranean country might eventually require a bail-out.

In order to appreciate the extent of Spain’s economic malaise, it is important to investigate the large macroeconomic imbalances that accumulated during the country’s long boom that lasted from the mid-1990s until crisis struck in 2007.

Spain benefited considerably from EMU membership and economic growth outpaced the OECD average in nine of the ten years pre-crisis, with the yearly increase in GDP exceeding the euro-zone as a whole by one to one-and-a-half percentage points over the period.  However, the long boom was built on shaky foundations that would be badly exposed once economic turbulence struck.

The stellar economic performance was driven primarily by a classic housing bubble alongside an ill-advised construction boom, which was stimulated by the reduction in interest rates that accompanied greater European integration.  The reference rate on home loans dropped from almost ten per cent in 1997 to just 3.3 per cent by 2007, and the resulting increase in housing demand led to a 115 per cent increase in house prices in real terms over the period.  The true extent of the overshoot in the housing market is demonstrated by the fact that price increases outpaced rental growth by roughly seven percentage points a year from the mid-90s until the bubble burst in 2007.

Strong housing demand enabled the construction market to flourish, and the resulting demand for unskilled labour contributed to a massive influx of immigrants in need of shelter, which perpetuated the cycle.  Indeed, the sustained demand for unskilled labour saw the population expand from 40 to 45 million, as the share of foreigners in the overall population jumped from just one-in-fifty in the mid-90s to almost one-in-eight at the boom’s apex.

The construction boom was fuelled not only by Spanish demand for second homes and immigrants in need of shelter, but further impetus was provided through increased home purchases by other EU citizens.  Indeed, net foreign investment in housing ranged from 0.5 and one per cent of Spanish GDP each year from 1999 to 2007.

The supply-side response to strong housing demand was nothing short of phenomenal.  The housing stock increased from 20.8 million in 2001 to 25.1 million, and the annual new supply regularly exceeded the new construction of France, Germany, Italy and the UK combined.  In fact, Spain added a new dwelling for each addition to the population over this period, such that the number of people to fill each home fell to 1.7 – the lowest in the developed world.

The bubble years were accompanied by a credit boom that saw households and non-financial businesses leverage their balance sheets to dangerous levels.  Indeed, household debt as a percentage of disposable income jumped from just 53 per cent earlier in 1997 to a peak of 132 per cent, while non-financial corporate sector debt jumped from less than 50 per cent of GDP to more than 130 per cent over the same period.  Importantly, a disturbingly large current account deficit meant that the debt-fuelled boom became increasingly dependent upon external financing, which rendered the economy vulnerable to a ‘sudden stop’ that duly arrived in 2007.

Investors’ concerns today are focussed on fiscal slippage and question marks over the true level of government debt, which many believe to be more than twenty percentage points higher than the official public debt-to-GDP ratio of 68 per cent.  However, investors should be equally troubled, if not more so, by the large private sector imbalances that have shown only marginal improvement since the crisis began.

Private sector debt remains unsustainably high, while house prices and the excesses in the construction sector will take several years to absorb.  Investors will be aware that troubled private sector debt has a habit of becoming public debt via an ailing banking system.  It’s déjà vu all over again in Spain.

Previously posted on www.charliefell.com


Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Even if one is a short-term trader, it is worth taking a look at the longer-term chart from time to time to see how things are developing in the higher time frames. My daily work has me usually focusing on daily and intraday charts, but now and again I’ll flip over to the weekly chart to gain that broader perspective. The thing I noticed today was an interesting development on the weekly USD Index chart.

As you can see below, the Bollinger Bands in that time frame have been getting progressively narrower since about the first part of the year. They are now very narrow. In fact, on a relative basis (as shown by the purple Band Width Indicator sub-plot) they are as narrow now as they got late in Q3 last year. Notice what happened then.

USD Chart Bollinger Bands

Since the USD Index is heavily weighted to the euro, we basically see the same narrow-Band situation for EUR/USD as we do for the index – just with the chart inverted.  We see similar tight Bollinger set-ups in GBP/USD and USD/CHF, which isn’t too much of a surprise given how closely related those currencies are from a fundamental (and central bank) perspective these days.

The interesting thing, however, is that once you get outside the European currencies the story is different – considerably so in some cases. The narrow-Band situation actually produced a major breakout in USD/JPY earlier this year. Now we’re seeing the market consolidate after its powerful rally.

JPY Chart

In the case of AUD/USD, we’ve got a market basically working through a sizeable range that’s been working since the highs were put in last year. We’re now seeing the market having turned down from its latest swing up, looking quite like it’s headed back for the bottom of the zone.

AUD Chart

If we flip AUD/USD over we get a pretty close approximation of how USD/CAD has traded. There difference, though, is in the recent action. Where the Aussie has been selling off, the Loonie has been holding steady over the last couple of months.

CAD Chart

So what does this all seem to say?

My interpretation would be this. The relatively better performance of the CAD vs. the AUD is indicative of at least the perception of the situations with the US and China respectively. These currencies are seen as closely linked via trade to their large neighbors, so as the US data has gotten better, the CAD has been supported, and as the China data has disappointed, the AUD has weakened.

Japan is largely its own situation. There is certainly some impact from China there, but mainly the yen trades as a function of two things. One is the stagnant economy in Japan, which is showing little sign of doing anything any time soon. The other is US interest rates. The correlation between USD/JPY and the US 10yr yields is quite strong as higher US rates make the yen more attractive as a carry trade funding currency than the dollar, plus more attractive for investment returns.

Then there’s Europe. To my mind, the ranging we’ve seen in the major pairs there is reflective of the markets getting a handle on where everything stands. We’re basically waiting on the next meaningful development. My guess at this point is that will have more to do with the US than it will Europe. I say that because the market seems to see the Eurozone issues as pretty clear with little change expected out of the ECB for a while. If anything the leaning is toward further loosening of policy by that central bank.

In the case of the US, though, the situation is on more of a knife’s edge. As we saw from the reaction to the FOMC meeting minutes Tuesday afternoon, there have been a number of market participants looking for another round of QE3 from the Fed (including the likes of Goldman Sachs). At the same time, though, we have others who see the US on a good sustained growth path. The USD is likely waiting to see which side is going to win that argument. How the USD Index moves out of its current consolidation will be indicative of which way that fight ends up going.


The seemingly never-ending Greek saga has weighed on market sentiment for more than two years, as investors increasingly questioned the troubled sovereign’s ability to repay its debt.  European policymakers insisted throughout that there was “no risk” of default, but the rhetoric ultimately proved long on hope, as the Hellenic Republic succumbed to the inevitable in recent weeks, and became the first developed country to default on its debt in six decades.

The largest sovereign default in history was greeted by investors with a mere shrug of the shoulders, a far cry from the violent reaction that policymakers long feared would bring the financial system to a standstill.  Simply put, the game has long since moved on, as investors relegated the Greek crisis to an uncomfortable but manageable sideshow, and the more pertinent question today is who’s next.

Policymakers argue that the Greek situation is a ‘unique and exceptional’ case, but such claims are certain to fall on deaf ears, given such rhetoric’s lack of credibility.  Indeed, investors have already placed Portugal firmly in their sights, and the beleaguered country’s sovereign debt has failed to participate in the meaningful downtick in euro-zone government bond yields precipitated by the first tranche of the ECB’s three-year long-term refinancing operation late last year.

Portuguese policymakers have expressed confusion at the debt market’s reaction to their seemingly heroic efforts to more-or-less meet the fiscal targets set-out by the troika in last year’s rescue package.  Indeed, the second review document published by the IMF last December revealed that the Lusitanian government managed to reduce the fiscal deficit by more than three percentage points of GDP last year to below six per cent, an impressive achievement against the background of a rapidly contracting economy.

Careful analysis however, suggests that the fiscal improvement is not as stellar as it might appear which will make it far more difficult to meet the targets for both this year and beyond.  In this regard, it is of concern to observe that last year’s effort would have fallen well short of target, but for the use of accounting cosmetics that masked the true magnitude of the underlying adjustment.

In fact, the reported deficit would have come in almost two percentage points below the desired level, but for a last-minute transfer of banking-sector pension funds to the government social security system.  This transfer accounted for almost sixty per cent of the fiscal adjustment in 2011, and removing this once-off item implies that the underlying improvement was actually 1.3 percentage points of GDP, considerably less than the ‘fudged’ reported number.

More importantly, the true fiscal position today reveals that the necessary adjustment to meet the target for 2012 is far greater than it appears in official documentation.  The deficit in 2011 – excluding the transfer of banking-sector funds – was 7.8 per cent rather than the 5.9 per cent reported, which means that the adjustment required to satisfy the 4.5 per cent target this year is more than three percentage points of GDP or two and a half times larger than the improvement implied by the unadjusted data.

The additional fiscal drag alongside an accelerating pace of domestic demand destruction and rapidly decelerating export growth means that this year’s economic contraction could well be much greater than the 3.3 per cent percentage point decline pencilled in official forecasts, which will make this year’s targets virtually unattainable.

Indeed, the year-on-year decline in domestic demand accelerated from below five per cent in last year’s third quarter to 9.5 per cent in the final three months of 2011, while export growth decelerated by more than three percentage points to below six per cent between the second and fourth quarter, as demand sagged in its major trading partners, most notably Spain.

Given the negative momentum, it is not difficult to construct a scenario in which the economy contracts by more than five per cent during the current year.  Given such an outcome, disappointing tax revenues alongside the strain on government expenditures could well see the fiscal deficit come in at seven per cent in 2012, while the level of outstanding public debt could jump to more than 120 per cent of GDP.

Needless to say, the notion that Portugal could return to the markets in the autumn of 2013 as currently envisaged under the rescue plan, would completely evaporate under such a scenario, while the pressure to restructure the Portuguese sovereign’s debt would likely prove insurmountable.

Further, it is important for investors to be aware that unlike Greece, the Portuguese crisis originally stemmed from excessive private-sector debts that currently amount to almost 200 per cent of GDP.  The large and persistent decline in the economy is certain to make a vast number of loans unserviceable, and the eventual losses incurred by the banking system could well become public debt.  In a nutshell, there could well be no option but to restructure Portugal’s sovereign debt in order to place its economy on a more sustainable path.

An ‘orderly’ debt default has been orchestrated in the case of Greece, but the insistence that it is a ‘unique and exceptional’ case looks empty as the spotlight turns to Portugal.  The negative momentum evident in the Lusitanian economy suggests that the restructuring of Portuguese sovereign debt could well prove unavoidable.  Investors should note that the euro crisis is far from over.

Previously posted on www.charliefell.com



Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

­­Our Two Cents – Week of 1/3/12

The crystal ball atop New York City’s Times Square has dropped, champagne glasses have clinked and confetti has strewn—all signs welcoming 2012. As we said goodbye to a year that saw economic commotion, we greeted the new year with a refined sense of optimism for the U.S. and equal thoughts of hope for abroad.

Americans are more confident about 2012 after what they say was a less-than stellar 2011, according to an Associated Press poll. Nearly 70 percent of Americans said 2011 was a poor year because of continuing economic crisis, and 62 percent said they were hopeful for a more positive 2012. About 37 respondents said they saw economic improvements coming within the next 12 months, and almost 40 percent believed their personal financial situations will improve. Signs that the U.S. economy is starting to accelerate are already coming to fruition. Experts say an improving job market and increasing retail sales—especially in the past holiday season—are reasons for why growth in the U.S. economy may hasten even if conditions abroad aren’t replicated. Holiday sales during the week ending Dec. 24 ascended nearly 15 percent from the same period in 2010 to $44 billion, thanks to Christmas Eve falling on a Saturday.

While the U.S. conditions are rebounding, Europe’s markets are starting 2012 on the right foot. Italy’s FTSE MIB index is up nearly 1 percent, and Germany DAX is also up more than 1 percent. Yields in Italy are down to below 6.9 percent.

In the last few days of 2011, Italy’s Treasury paid significantly less to borrow money for six months than it did a month ago, restoring some senses of economic confidence. Even though Spain has slipped into recession, the country’s inflation has eased much more than expected in December to its lowest level in 13 months. Inflation rates also relaxed in Germany for the third straight month.

Speaking of Germany, it received the highest mark on the Bank of Montreal’s economic report card of the world’s most important economies in 2011. The nation earned a score of 89.2 because of its 2.5-percent inflation rate, 7.1-percent jobless rate and 1.2-percent budget deficit. Greece closed the list at No. 12 because of its 3.2-percent inflation rate, 16.6-percent jobless rate and 5.9-percent budget deficit. The U.S. earned the No. 6 spot for its 3.2-percent inflation, 9-percent jobless rate and 10-percent budget deficit. The bank based ratings on low inflation, low unemployment and low budget deficits.

The year 2012 also observes the 10th anniversary of the euro. While some individuals blamed the euro for causing Europe’s economic meltdown, the monetary unit could become the world’s leading single-currency alliance if leaders can succeed in tightening fiscal integration, according to one official from the European Central Bank. ECB policymaker Christian Noyer said if European officials can implement the actions from the Dec. 9, 2011, emergency summit, the union will emerge stronger.




Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

The world watched European leaders last week take the next step toward saving the euro, a move that sparked some optimism from bank officials. In the U.S., jobless claims fell to new lows, and confidence abounded from Wall Street women about alternative investments.

Applause sounded after leaders at the European Summit agreed to sign an intergovernmental treaty to enforce stricter fiscal standards in their future budgets. Efforts to get all 27 members of the European Union (EU) failed as Britain and Hungary opted out. Importantly, the 17 euro zone members agreed to the new treaty, a welcoming sign to the European Central Bank (ECB) that said the treaty would be the basis of good financial discipline moving forward. Before the summit, Standard and Poor’s warned of possible credit downgrades of 15 euro zone nations, preparing to place those nations—including the powerhouse of Germany—on credit watch negative. This action normally signals a downgrade within three months. According to S&P, the action was “prompted by [its] belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole.”

Also in Europe, Greece readied its next step for its bailout. Inspectors for the country’s international lenders and private credits are meeting and preparing for a new 130-billion euro bailout plan and bond swap to keep the country’s economy alive. The EU, International Monetary Fund (IMF) and the ECB—known as the troika—are visiting Athens to start preparing the bailout plan agreed in October as well as assessing the impact of debt swap plan on banks. Earlier last week, Greece approved its 2012 austerity budget as it tried to cut its debt and pull itself out of recession. Responding to the measures, many Greek youths protested, hurling stones, bottles and firebombs at police. The country’s fiscal package included some very tough cuts that will unfortunately keep many Greeks feeling cash strapped. While Greece’s fiscal matters proceeded, Hungary sought a 10-to-15 million euro package from the IMF and EU to help stabilize its economy. The country asked for assistance after its forint currency hit record weakness because of market skepticism about the government’s unconventional policies.

In the U.S., new jobless claims fell to a nine-month low, showing signs that the job market may be improving. The Labor Department said weekly applications declined by 23,000 to 381,000. Some more good news came from women on Wall Street as they planned to seek alternative investments. Nearly 65 percent of the women surveyed said they expected to find attractive investment opportunities, according to a study by the professional services firm Rothstein Kass and the international women’s group 85 Broads. More than half of the women said they planned to start new funds too.




Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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The upturn in global economic activity that began more than two years ago faces a stern test of its resilience – in view of the ongoing trauma in the euro-zone – and, could well be short-circuited should the elevated stress in credit markets refuse to subside in the near future.  The financial markets have already priced in a mild European recession over the next two quarters, which the global economy should be able to withstand without too much dislocation but, such optimism could well be misplaced.

Indeed, it is not difficult to construct a scenario in which a probable downturn in euro-zone activity is more severe and, of longer duration than most commentators currently believe.  Should such an outcome unfold, strong global interdependence amongst economies virtually ensures that the negative impact on economic activity across the globe would be far more pronounced than the consensus currently anticipates.

The current cheery consensus among market practitioners is difficult to fathom given recent developments in the euro-zone and, more than likely, reflects the all-too-human tendency to overweigh the positive potential outcomes and, to place too little emphasis on uncomfortable negative scenarios.  The fact of the matter however, is that the probability of a severe recession can no longer be considered non-trivial for a number of reasons and, as a result, asset allocations should be adjusted appropriately to reflect expected outcomes rather than wishful thinking.

Euro-zone business surveys have already slipped to levels that are consistent with a contraction in economic activity but, the optimists are confident that Europe’s leadership will do whatever is necessary to contain the decline.  Such optimism appears to be based on hope rather than reality however, as both Brussels and Frankfurt appear to believe that the only road to lower market interest rates and a return to healthy economic growth is fiscal austerity – a policy prescription that is almost certain to lead to heightened rather than reduced market stress.

Fiscal austerity across the euro-zone is unlikely to appease the financial markets for one simply reason – domestic private demand is not sufficiently strong to absorb the deflationary impact.  Indeed, the elevated stress in the credit markets has already taken a heavy toll on business confidence while, surveys of lending conditions show that the banking system has become less willing to supply credit and, standards are virtually certain to tighten further, once the recapitalisation of ailing balance sheets – as prescribed by policymakers – gets underway.

A deep recession is virtually certain given current policy prescriptions and, as a result, financial market stress is unlikely to ease.  The contraction in economic output will cause tax revenues to fall short of plan and, government expenditures to exceed original estimates due to the rise in unemployment benefits.  The wider-than-expected budget deficits mean that public debt-to-GDP ratios across the euro-zone are likely to edge higher and, ensure that yields on sovereign debt remain uncomfortably high.

The optimists argue that such a scenario is unlikely to unfold, which seems to be predicated on the belief that the ECB will reduce policy rates aggressively and, ultimately purchase sovereign debt in sufficient size to ease the strain on governments.  Once again, such premises are built on hope rather than hard fact.

First, market funding costs have already disconnected from policy rates, while lending standards are beginning to show a similar dynamic.  As such, it is reasonable to argue that the stimulus to economic activity, arising from a reduction in interest rates from their current low levels, is likely to be negligible.

Second, the ECB is extremely reluctant to expand its balance sheet and purchase large quantities of stressed sovereign debt given the credit risk that it would assume.  Any sovereign that issues debt in a currency that it does not control, is simply not free of default risk.  Indeed, the Greek case clearly demonstrates to private investors that holding distressed euro-zone sovereign debt is not that far removed from owning high-yield bonds.

The truth of the matter is that the ECB is unlikely to purchase troubled sovereign debt without an ironclad guarantee that it will be compensated in the event of losses.  Such a guarantee would not appear to be on the table in Berlin and, is unlikely to be, in the absence of further fiscal integration.  This process will take time and as a result, aggressive ECB action could happen later rather than sooner.

The odds of a severe euro-zone recession are growing by the day and, it would be foolish to believe that the rest of the world would emerge unscathed given the increase in financial interconnections and trade linkages.  Indeed, one important lesson to glean from the ‘Great Recession’ is that greater global integration ensures that an economic crisis in one region is quickly transmitted to another.

Global decoupling is nothing but an old wives’ tale and, investors should note that the escalating euro crisis puts the entire world economy at risk.

Originally posted on www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.