Press review - page 448

[Sergey Golubev]

Forum on trading, automated trading systems and testing trading strategies

Press review

Sergey Golubev, 2013.07.21 08:29

The Markets’ Worst Kept Secret

• Lashing central bankers
• The math of debt
• Dreaded reform
• Risk of another debt bust?

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Here’s what your stockbroker and the media aren’t telling you: the world is more indebted now than it was at the height of the financial bubble in 2007. That’s right. Despite the extraordinary government intervention of the past six years. Despite continuing optimism of a recovery. Despite the reassuring words of central bankers. We’re worse off in debt terms.

From this, there are several inevitable conclusions that will be discussed in depth in this piece:

1. The policies pursued since the financial crisis haven’t worked. Otherwise, debt to GDP ratios would be decreasing, not increasing.
2. Interest rates can’t rise above GDP rates, otherwise debt to GDP ratios will climb further. If they do, you can expect more money printing, budget cuts and tax rises.
3. That means low interest rates are likely to stay for many, many years. It’s the only way to bring the debt down to more sustainable levels.
4. The startling thing about the past six years is the almost total lack of reform to fix the problems which led to the 2008 debt bust. It’s ironic that a paragon of communism, China, may well be the one to soon lead the way on substantive capitalist reforms.
5. Emerging markets, including my neighbourhood of Asia, may be better off than the developed world when it comes to debt, but rising asset and commodity prices have papered over several problems. And these problems are now coming to light.
6. Debt crises happen because incomes can’t support the servicing of the debt any longer. If there is any drop-off in economic growth, a 2008 re-run could well be around the corner. That’s not trying to be dramatic; it’s just the way the math pans out.

Lashing central bankers

It’s been surreal to watch news of Detroit’s bankruptcy this week. Once the bastion of a thriving American automobile industry, the city is now on its knees. Meanwhile, U.S. stock market indices are hitting all-time highs. Compare and contrast…

But it’s also been fascinating to see the commentary around the bankruptcy. Much of this commentary blamed a sharply declining population for the crisis and a host of other reasons. Less mentioned though was the real reason for the bankruptcy: Detroit simply spent far more than earned. And it went deeper into debt to finance the spending, until it could no more.

It’s not entirely surprising that this has been largely overlooked and that Detroit is being treated as an isolated case. That’s what politicians in the U.S. and across the developed world want you to believe. That debt isn’t a big deal and that they can help their cities and countries grow their way out of indebtedness, but they just need a bit more time to achieve this

However, a recent report by the Bank Of International Settlements (BIS) – often referred to as the central banks’ bank – shows how difficult this task will be. The BIS annual report outlines, in a clear and often confronting way, the realities of the world’s indebtedness and how current money printing and low interest policies won’t fix the problems emanating from 2008. The BIS has credibility as it was one of the very few institutions to warn of excesses in the lead up to the financial crisis. I can’t recommend the report highly enough.

Let’s have a look at some of the report’s key passages. First, the BIS details the extent of the world’s debt problem. It says total debt in large developed market and emerging market countries is now 20% higher as a percentage of GDP than in 2007. In total, the debt in these countries is US$33 trillion higher than back then. Almost none of the countries that it monitors are better off than 2007 in debt to GDP terms.

The BIS describes the level of debt as clearly unsustainable. The primary reason is that studies have repeatedly shown that once debt to GDP rises above 80%, it retards economic growth. Obviously, if money is being spent on servicing debt, then there’s less to spend on investment etc. Most developed market economies now have debt to GDP levels exceeding 100%.

The BIS says governments need to quickly get their balance sheets in order and does some math to prove why. It says current long-term bond yields for major advanced economies are around 2%, well below the average of the two decades leading up to the crisis of 6%.

If yields were to rise just 300 basis points across the maturity spectrum (and still be below average), the losses would be enormous. Under this scenario, holders of U.S. Treasury securities would lose more than US$1 trillion dollars, or almost 8% of U.S. GDP. The losses for holders of debt in France, Italy, Japan and the U.K. would range from 15% to 35% of GDP.

Being the primary holders of this debt, banks would be the biggest losers and ultimately such losses would pose risks for the entire financial system.

The BIS doesn’t let emerging countries off the hook either. It suggests that while debt may be lower in these countries, they’ve benefited from rising asset and commodity prices, which are unlikely to be sustainable. And therefore caution is warranted here too.

But now we get to the juicy bit where the BIS calls the extraordinary policies of developed market central banks into question. For a conservative institution such as the BIS, the language is nothing short of scathing:

“What central bank accommodation has done during the recovery is to borrow time – time for balance sheet repair, time for fiscal consolidation, and time for reforms to restore productivity growth. But the time has not been well used, as continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system. After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change.”

And then this:

“Governments hope that if they wait, the economy will grow, driving down the ratio of debt to GDP. And politicians hope that if they wait, incomes and profits will start to grow again, making the reform of labour and product markets less urgent. But waiting will not make things any easier, particularly as public support and patience erode.”

The BIS recommends urgent, broad-based reforms which principally involve cutting back on regulation to allow high-productivity sectors to flourish and for growth to return. It also says households need to makes further cuts to their debts while governments also need to get their balance sheets in order. And regulators need to make sure banks have the capital to absorb any risk of potential losses of the type mentioned above.

The math of debt

It’s worth elaborating on why the current path appears unsustainable, as the BIS alludes too. Put simply, debt is a promise to deliver money. If debt rises faster than money and income, it can do this for a while but there comes a cut-off point when you can’t service the debt. When that happens, you have to cut back on the debt, or deleverage in economic parlance.

There are four ways to deleverage:

1. You can transfer money (Germany transfers money to Cyprus)
2. You can write down the debt. Note though, that one country’s debt is another’s asset.
   
3. You can cut back on the debt. These days, that’s looked down upon and consequently called austerity.
   
4. You can print money to cover the debt.
   

Since 2008, we have seen countries employ all four of these methods.

But the real key is to make sure that interest rates remain below GDP rates. If that happens, debt to GDP levels will gradually fall. If not, they’ll inevitably rise. So say bond yields rise to the post war average of 6% in the U.S., and interest rates increase to comparative levels, nominal GDP would have to be above 6% for debt to GDP levels to decline.

If you understand this, then you’ll realise that talk of “tapering” in the U.S. is likely a load of baloney. Real U.S. GDP growth is expected to be close to 1% in the second quarter, with inflation at around 1.1%, resulting in nominal GDP growth of 2.1%. Many expect this nominal GDP to rise to +3% over the next 12 months. But even at those levels, bond yields can’t be allowed to rise much further (with 10-year yields at close to 2.5%). Otherwise, debt to GDP ratios will rise, impeding future growth and making budget cuts, tax rises and more money printing inevitable.

If the U.S. does taper and bond yields there rise, this would put upward pressure on bond yields in Europe. With GDP growth near zero and still exorbitant debt levels, higher bond yields would quickly crush the Eurozone.

This is why central banks can’t allow higher bond yields and interest rates. Of course, central banks don’t control long-term bond yields; markets do. If central banks want low bond yields, markets will comply until they don’t. That is until they don’t trust that the current strategies of central banks are working. Given that investors are still enamoured with the every word and hint of Ben Bernanke and his ilk, it would seem that the time when bond markets do turn ugly is still a way off.

Dreaded reform

As the BIS points out though, reform is also critical to better economic growth for the developed world and lower debt burdens. On this front, it’s amazing how little restructuring has actually occurred in the U.S. and Europe.

In the U.S. for instance, can you name one piece of significant reform which has reduced regulation and led to growth in new prospective sectors? I can’t, but maybe I’ve missed something.

The trend of the U.S. results season seems to bear this out. U.S. banks have killed it, while many other sectors such as tech haven’t. It’s hardly surprising that current policies are benefiting banks at the expense of the real economy. After all, not only did banks get massive bailouts in 2008 but they’ve been given almost free money from the Federal Reserve via QE ever since. The banking sector is not back to 2007 levels but it’s gradually getting there. Who would have thought this would happen just six years after the biggest debt bust in more than 70 years?

It’s somewhat ironic that instead of the U.S. or Europe, it’s Asia which may be about to lead the way on the reform front. Late on Friday, China announced that it would scrap controls on lending rates and let banks price their loans by themselves. This means cash-strapped companies may have access to cheaper loans. This cheaper credit could further spur the current debt bubble. But the move is likely to have an adverse impact on the profitability of the state-owned banks, thereby making them more reluctant to lend.

It’s expected that the move will foreshadow a later, more important policy to remove controls on deposit rates. Higher deposit rates would increase household income and go some way towards the government’s goal to increase consumption and re-balance the economy.

These financial reforms are likely to be only a small part of a plethora of reforms that China will announce over the next 3 months. As I’ve said previously, I think investors are underestimating the pragmatism of the new leadership and their willingness to take short-term pain to reap later benefits. It won’t be enough to prevent a serious economic downturn but it bodes well for the long-term. The one risk to this scenario is if growth slows enough for unemployment to rise. If that happens, stimulus may again become the got-to tool at the expense of reform. But we’re nowhere near that point yet.

Japan is the other country which may go through with some significant reform. This weekend’s parliamentary elections should solidify Shinzo Abe’s power and give him the platform to pursue more deep-seated reforms. However, the big question remains whether any reform can prevent the country from being overwhelmed by its enormous debt. I’m in the minority suggesting that the debt is simply too large and reform will do little to prevent Japan from going insolvent, if it isn’t already.

Risk of another debt bust?

Which brings me to the key conclusion of this piece. That is, it’s hard to see the U.S, Europe, Japan and other developed world countries implementing reform in time to prevent their debts from rising further and possibly imploding. In other words, many of the fears of the BIS may well come true.

That may sound pessimistic and, to some, melodramatic. But the reality is that little has been done in the past six years to restructure economies and cut debt ie. learning the lessons of 2008. Because we’ve partially recovered from that traumatic period, that’s led to complacency. All the while, the debt that caused the bust in the first place has compounded and threatens to undo the world again.

Let’s hope it doesn’t come to that.

[Sergey Golubev]

USD/CNH Ahead of US 3Q GDP (based on the article)

Daily price is on primary bullish market cndition located above 100 SMA/200 SMA: the price broke 6.7757 level to above on clos  daily bar for 6.7969 resistance level to be broken for the bullish trend to be continuing.

• "The pair surged higher after breaking resistance around the 6.7 handle followed by the 2016 January high around 6.7584."
• "Indeed, momentum still looks strong as we head into today’s key US 3Q GDP numbers, which could prove influential for the pair’s direction in the near term."
• "As it were, price is now sitting in close proximity to the 6.8 handle, and a break higher seems an important milestone for further gains."
• "If the pair reverses course, downside moves might still be interpreted as corrective as long as buyers can keep price above the 6.7 level."

The most likely scenario for the daily price movement is the following: the price breaks 6.8 resistance level to above for the bullish trend to be resumed, otherwise - ranging bullish.

[Sergey Golubev]

Trading the News: U.S. Gross Domestic Product (GDP) (adapted from the article)

• "The U.S. economy is projected to grow an annualized 2.5% in the third-quarter of 2016, and a marked pickup in the Gross Domestic Product (GDP) may boost the appeal of the greenback and trigger a near-term decline in EUR/USD as it fuels speculation for an imminent Fed rate-hike."
• "It seems as though the Federal Open Market Committee (FOMC) is following a similar path to 2015 as a growing number of central bank officials endorse a December rate-hike, but the majority may continue to endorse a ‘gradual’ path in normalizing monetary policy as ‘survey-based measures of longer-run inflation expectations were little changed, on balance, while market-based measures of inflation compensation remained low.’ With that said, a marked slowdown in the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, may spark a bearish reaction in the greenback as it drags on interest-rate expectations."

Bullish USD Trade: U.S. Expands Annualized 2.5% or Greater

• "Need a green, five-minute candle following the report to favor a long EUR/USD trade."
• "If market reaction favors a long sterling trade, buy EUR/USD with two separate position."

Bearish GBP Trade: 3Q Growth Report Falls Short of Market Expectations

• "Need a red, five-minute candle to favor a short GBP/USD trade."
• "Implement same strategy as the bullish dollar trade, just in reverse."

Daily price is located below 100-day SMA (100 SMA) and 200-day SMA (200 SMA) for the bearish area of the chart for the ranging within the narrow support/resistance levels: the price is testing 1.0859 support level to below for the bearish trend to be continuing with 1.0814 nearest daily target to re-enter. Descending triangle pattern was formed by the price with 1.0859 support level to be crossed for the bearish trend to be resumed.

• If D1 price breaks 1.0859 support to below on close bar so the primary bearish trend will be continuing with 1.0814 nearest daily bearish target.
• If price breaks 1.1038 resistance level to above on close daily bar so the local uptrend as the bear market rally will be started.
  
• If not so the price will be on bearish ranging within the levels.

[Sergey Golubev]

Intra-Day Fundamentals - EUR/USD and USD/CAD : U.S. Gross Domestic Product (GDP)

2016-10-28 12:30 GMT | [USD - GDP]

• past data is 1.4%
• forecast data is 2.5%
• actual data is 2.9% according to the latest press release

if actual > forecast (or previous one) = good for currency (for USD in our case)

[USD - GDP] = Annualized change in the inflation-adjusted value of all goods and services produced by the economy.

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From official report:

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EUR/USD M5: 24 pips range price movement by U.S. Gross Domestic Product news events

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USD/CAD M5: 39 pips range price movement by U.S. Gross Domestic Product news events

[Sergey Golubev]

Forum on trading, automated trading systems and testing trading strategies

Eur/Usd in expectancy of a US interest rate hike in December.

Thomas Lawson, 2016.10.29 01:04

Eur/Usd Fibonacci technical levels 23% 1.09328. 38% 1.09844 50% 1.10259. Take Profit targets 1.08161 1.06860. The Forex pair is currently in a downtrend.

[Sergey Golubev]

Weekly EUR/USD Outlook: 2016, October 30 - October 06 (based on the article)

EUR/USD struggled to recover, but it also did not extend its falls. A mix of PMIs, inflation figures and also GDP stand out at the turn of the month. Here is an outlook for the highlights of this week.

 

1. German Retail Sales: Monday, 7:00.
2. CPI: Monday, 10:00. 
3. GDP: Monday, 10:00. The 19-country eurozone has grown by 0.3% q/q in Q2 2016, and further growth is on the cards also in Q3. Spain’s growth remains encouraging, but France lags behind.
4. Spanish Unemployment Change: Wednesday, 8:00. 
5. Manufacturing PMIs: Wednesday morning: 8:15 for Spain, 8:45 for Italy, 8:50 the final number for France, 8:55 final figure for Germany and 9:00 final figure for the euro-zone.
6. German Unemployment Change: Wednesday, 8:55. 
7. ECB Economic Bulletin: Thursday, 9:00. Two weeks after the European Central Bank left its policies unchanged, the Frankfurt-based institution releases the data that its members saw before making the decision.
8. Unemployment Rate: Thursday, 10:00. 
9. Services PMIs: Friday morning: 8:15 for Spain, 8:45 for Italy, 8:50 the final number for France, 8:55 final figure for Germany and 9:00 final figure for the euro-zone.
10. PPI: Friday, 10:00. 

[Sergey Golubev]

Week Ahead: FX Markets Into RBA, BoJ, FOMC, And BoE - Credit Agricole (based on the article)

FOMC: "We believe that any taper tantrum angst is premature, however. Next week’s Fed meeting should make an explicit reference to a rate move in December but there seems to be less scope for aggressive tightening of US financial conditions given that the implied probability of a hike is already close to 75%. We doubt that there will be a sustained risk selloff either, especially if the non-farm payrolls and ISM data underpins the constructive outlook for the US economy and adds to the recent stream of positive economic surprises from around the world. Next to the Fed and US data, more evidence of growing demand for USD-funding, reflected in widening of EUR-USD and JPY-USD cross currency swap rates, and elevated USD/CNH rates, should keep USD supported."

 

BoE: "The BoE’s inflation report should attract some attention next week, not the least given that some analysts are still calling for a rate cut. We expect the MPC to keep policy unchanged and link any prospects of further easing to the path of the GBP, which according to Governor Carney has depreciated ‘substantially’ more recently. Data releases as well as indications that the UK government would pursue a somewhat ‘softer’ version of Brexit could also help GBP consolidate more broadly in the coming days." 

  

RBA: "The RBA could revise up its inflation outlook and dash hopes for further easing from here, helping AUD regain more ground. Demand for carry trades could continue to support the AUD in the absence of sustained tightening of global financial conditions." 

 

BoJ: "The former should alleviate recent market concerns about an imminent taper that was fuelled by a drop in the 10Y JGB yields to below zero. This together with the persistent steepness of the JGB yield curve should keep Japanese stocks and USD/JPY generally supported." 

 

[Sergey Golubev]

Weekly Fundamental Forecast for Dollar Index (based on the article)

Dollar Index - "Though there are a lot of direct fundamental sparks to move the Dollar in the week ahead, we should still keep sight of the crosswinds. Much of the Greenback’s movements these past weeks have come on the basis of weakening counterparts. Motivated counter currencies can keep the pressure – bullish or bearish – on the Dollar moving forward. Themes of Brexit, China devaluation, faltering Eurozone stability and BoJ capitulation stand ready to move the needle."

[Sergey Golubev]

Weekly Fundamental Forecast for USD/JPY (based on the article)

USD/JPY Index - "At the same time, the BoJ may also stick to the sidelines as Governor Haruhiko Kurodaand Co. anticipate the non-standard measures (negative-interest rate policy & the quantitative/qualitative-easing program with ‘yield-curve control’) to help achieve the 2% target for inflation, but a material adjustment in the central bank’s forecast may further weaken the Japanese Yen should the committee push out its pledge in delivering price stability. In fact, the BoJ may have little choice but to look beyond the second-half of fiscal-year 2017 in reaching its inflation goal as the core-core Consumer Price Index (CPI) slipped to an annualized 0.0% from 0.2% in August, and the fresh batch of central bank rhetoric may drag on the local currency should the BoJ show a greater willingness to preserve the highly accommodative policy stance for longer. However, the recent depreciation in the Japanese Yen may largely unravel if the BoJ retains the status quo largely endorse a wait-and-see approach for monetary policy."

[Sergey Golubev]

Weekly Fundamental Forecast for AUD/USD (based on the article)

AUD/USD Index - "The RBA monetary policy announcement is in the spotlighton the domestic front. The central bank is widely expected to keep the benchmark cash rate unchanged at 1.5 percent, with the priced-in probability of a decrease at just 5 percent. This puts the onus on any forward guidance to be offered in the policy statement released following the sit-down."