Month: June 2012

By TraderVox.com

Tradervox (Dublin) – Reports from the US show that the economy is halting giving the Federal Reserve room for further stimulus. Data from the Labor Department showed more Americans applied for jobless claims with another report showing consumer prices dropped the most in three years.

Jobless claims unexpectedly climbed to 386,000 last week according to figures released by Labor Department today in Washington. The living cost dropped by 0.3 percent last month with the price of gasoline decreasing by most in three years according to report. These reports have added to speculations that Fed will take more action to spur growth.

The Labor Department report showed that unemployment rate is at 8 percent where it has been since 2009. However, cheaper costs have provided relief for most American as they experience slowing job and wage gains which has resulted to low consumer spending. According to Kevin Logan, who is the Chief IS Economist in New York HSBC Securities USA Inc, said the report will keep the Fed focused on employment and growth outlook as they meet next week. Apart from Fed decision next week, investors are also waiting for Greece election result which is expected to determine the future of the nation in the single currency bloc.

According to Bricklin Dwyer who is an economist at BNP Paribas, the disappointing report from the Labor Department show lack of traction in the labor market hence increasing the need for Fed to do more. The report also indicated that the cost of energy decreased by 4.3 percent from the previous month as gasoline dropped by 6.8 percent, which is the biggest drop since December 2008. With such reports coming from the US data, and pro-stimulus sentiments from Fed Vice Chairman Janet Yellen who signaled scope for more easing, speculation Fed mare add stimulus has increased.

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Investors expressed relief over the projected victory of pro-bailout parties in the Greek elections on Sunday, but they quickly turned their attention to the structural problems in southern Europe that continue to threaten the global economy.

There is still a lot of uncertain factors concerning the future EU debt-structure, Spanish banks and growth slowdown.

This week is shaping up to be a major one. We have the G20-meeting i Mexico and Fed meeting on Wednesday.

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The euro saw gains across the board on Friday, as investors were confident that whatever the outcome of the Greek election being held over the weekend, the international community would actively work to support the euro-zone. The EUR/USD closed the week at 1.2662, up over 70 pips for the day. This week, traders will want to continue monitoring news out of Greece. It is unlikely that a new government will be formed immediately following the election. Therefore, the potential for heavy euro volatility still exists depending on what the makeup is of the new Greek government.

Economic News

USD – Dollar Extends Bearish Trend Following Poor US News

The US dollar took additional losses against its main currency rivals on Friday, following the release of a worse than expected Prelim UoM Consumer Sentiment figure which investors took as a sign that the US economic recovery is stalling. Against the JPY, the dollar dropped 90 pips for the day, reaching as low as 78.60 during early morning trading. The greenback was able to stage a minor correction to close out the week at 78.75. The USD/CHF dropped over 50 pips during evening trading, eventually finishing out the week at 0.9483.

Taking a look at this week, Wednesday may turn out to be a volatile day for the USD, as the FOMC Statement at 16:30 GMT, followed by the FOMC Press Conference at 18:15 are expected to give clues as to any plans the Fed has to initiate a new round of quantitative easing to stimulate the US economy. Any talk of a new stimulus package in the US this week may lead to significant dollar losses, particularly against the safe-haven Japanese yen.

EUR – Greek News Set to Generate Euro Volatility

The euro was able to extend its bullish trend to finish out the week on Friday, as investors were fairly confident that despite the outcome of this past weekend’s Greek elections, the international community would actively work to boost euro-zone economies. In addition to gaining some 70 pips against the US dollar, the euro advanced over 60 pips against the Japanese yen and 50 pips against the Canadian dollar. That being said, the euro was not at fortunate against the British pound. The EUR/GBP dropped close to 100 pips on Friday to finish out the week at 0.8052.

This week, Greece is once again likely to dominate the headlines and create the most market volatility. Depending on what the final makeup of the new Greek government is, the euro could either turn significantly bullish or bearish. That being said, any gains the euro makes could be short-lived. Analysts are warning that even if a pro-austerity government is elected in Greece, economic troubles in both Spain and Italy may continue to weigh down on the euro.

Gold – Gold Continues to Benefit from Global Economic Turmoil

Gold saw additional gains in trading on Friday, following poor US news which caused investors to shift their funds to safe-haven assets. The price of gold increased by over $10 an ounce by the mid-day session, eventually reaching as high as $1632.23. A slight downward correction during evening trading eventually led to gold finishing the week at $1626.55.

This week, gold traders will want to continue monitoring news out of the US. In particular, Wednesday’s FOMC press conference may offer clues as to any plans the Fed has to initiate a new round of quantitative easing to stimulate growth in the US economy. If the Fed does mention any form of monetary stimulus in the coming days, investors may continue shifting their funds to safe-havens, which could cause gold to extend its bullish trend.

Crude Oil – Crude Oil Trades Flat to Finish out the Week

The price of crude oil saw little movement on Friday, as weak economic data out of the US and investor anxiousness regarding the outcome of the Greek election kept the commodity close its recent lows. After reaching as high as $84.75 a barrel during overnight trading, crude oil saw a slight downward correction, which brought the price down to $83.39 during the mid-day session.

Turning to this week, the direction crude oil takes is likely to depend on how investors interpret the results of Greece’s election. Any sign that the results of the election will lead to further euro-zone troubles may cause oil to turn bearish in the coming days. At the same time, should a pro-austerity government be formed in Greece, fears regarding the euro-zone could calm down which could lead to gains for crude.

Technical News

EUR/USD

Long term technical indicators are providing mixed signals for this pair. On the one hand, the weekly chart’s MACD/OsMA seems like it is about to form a bullish cross. On the other hand, the daily chart’s Williams Percent Range is in overbought territory, indicating that downward movement could occur. Taking a wait and see approach for this pair may be the best choice.

GBP/USD

The Williams Percent Range on the daily chart is currently in the overbought zone, indicating that downward movement could occur in the near future. In addition, the Slow Stochastic on the same chart seems like it is about to form a bearish cross. Traders will want to pay attention to this indicator. If it forms the cross, it may be a good time to open short positions.

USD/JPY

The Bollinger Bands on the weekly chart are narrowing, indicating that this pair could see a price shift in the coming days. Furthermore, the Williams Percent Range on the same chart is hovering close to the oversold zone. Traders may want to go long in their positions for this pair.

USD/CHF

A bullish cross on the daily chart’s Slow Stochastic indicates that this pair could see an upward correction in the near future. This theory is supported by the Williams Percent Range on the same chart. Going long may be the best choice for this pair.

The Wild Card

Platinum

The Williams Percent Range on the daily chart is currently in the overbought zone. In addition, the Slow Stochastic on the same chart has formed a bearish cross, while the Relative Strength Index is hovering close to the 70 line. This may be a good time for forex traders to open short positions ahead of a downward breach.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

By Central Bank News
    The Reserve Bank of India is keeping its key repo rate and cash reserve ratio (CRR) unchanged, despite expectations for a cut, to dampen inflationary expectations despite the economic slowdown.
    Economist had expected the RBI to trim rates after growth in the fourth quarter dropped to a nine-year low. The RBI kept the policy repo rate at 8 percent and the CRR at 4.75 percent.
    The RBI acknowledged the pressure for it to lower rates, but said a “further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures.”

    The RBI cut its repo rate by 50 points and the CRR by 1.25 percentage points in April,  a move the RBI described as “front loading the policy rate reduction.”
    The RBI said the debt problem in the euro area continues to weigh on the global economy, but if there was “an event shock, central banks in advanced economies will likely do another round of quantitative easing. This will have an adverse impact on growth and inflation in EDEs (emerging and developing economies), particularly oil importing countries such as India, through a possible rebound in commodity prices.”
    But the RBI is concerned about inflationary expectations after provisional data showed that inflation rose to 7.6 percent in May from 7.2 percent in April, mainly due to food and fuel prices.
    “Notwithstanding the moderation in core inflation, the persistence of overall inflation both at the wholesale and retail levels, in the face of significant growth slowdown, points to serious supply bottlenecks and sticky inflation expectations.”
    Click for full RBI statement.

By MoneyMorning.com.au

I came all too close to crashing my bike this morning.

This was all Greece’s fault of course.

I’ll explain… I was deep in thought over the Greek election as I rode my bike into work. After the last two years, I’ve got a bad case of ‘Greece fatigue’. Frankly, I’ve reached the point where I’d rather watch a 24-hour cooking/dancing/home-renovation reality-TV marathon instead of the latest comings and goings in Greece.

So as my mind wandered in search of what to say about Greece this morning, I almost cycled straight into the back of another cyclist.

A screech of tyres and a swerve, and I averted disaster (note to other rider – cycling at 5kph is slower than walking).

But while I managed to avoid the other cyclist, there’s no avoiding Greece…

This morning the ASX200 is up 60 points on the news that New Democracy (the good guys) pipped Syriza (the bad guys) to the post – 128 seats to 72 seats. Here’s the breakdown:

New Democracy received 29.53% of the vote, equivalent to 128 seats.
Syriza received 27.12% – 72 seats.
Pasok received 12.2% – 23 seats.
Independent Greeks received 7.56% – 20 seats.
Golden Dawn received 6.95% – 18 seats.
Democratic Left received 6.23% – 17 seats.
Greek Communist Party received 4.47% – 12 seats

But the bad news is that New Democracy now has just three days to negotiate a coalition if they want to have a workable majority. And seeing as all these parties loathe each other to the core, they’ve got their work cut out for them. You’d get more chance of consensus from a playground full of five year olds. And to think Greece was the birthplace of democracy…

The result?

Yet another week of market uncertainty thanks to the endless saga of Greece.

But my point this morning is this: it may be getting all the headlines, but Greece is really just a side show.

The market may have a misplaced rally on New Democracy’s ‘win’, but this is just a distraction.

The main event is taking place in the economies of Spain and Italy.

Crisis on the Med

Spanish economic growth has stalled. Its unemployment is 24.4%, which is even higher than Greece’s at 22.6%.

The difference is that Spain is Europe’s 4^th largest economy. Spain is to Greece, what Australia is to Victoria.

And Spain is unravelling before your eyes. The 100 billion euros offered by the European Central Bank last week calmed the market for all of five minutes. Spanish 10-year bond yields are close to 7% again. If 6% is ‘code red’, then 7% is ‘code brown’.

As for Italy, according to the government everything is just peachy. They deny there is anything to worry about. But in the words of the character James Hacker, in the TV show Yes Minister, ‘Never believe anything until it’s officially denied’.

So, you know Italy will soon need a bailout when Prime Minister, Mario Monti, ‘forcefully denied’ the comments by Austria’s Finance Minister that Italy is next in line for a bailout. To then seal the deal, the Italian industry minister denied it as well.

The Italian 10-year yields are also well on their way to ‘code brown’ territory.

This is the world’s third biggest bond market (after the US’ and Japan’s). So a rising Italian yield is a big deal.

But it’s not just the bond yield telling us Italy is up the creek without a paddle. We just have to remind ourselves which country’s banks took up most of the 1 trillion euros of Long Term Financing Option (LTRO) loans earlier this year. Italy gobbled up all it could get, totalling more than 270 billion euros in total.

Is that the action of a confident banking sector..?

Italian banks took the most emergency LTRO loans

Where do the Economies of Italy and Spain Stand?

According to Magellan Asset Management, ‘Italy and Spain total sovereign funding is estimated at €421 billion for 2012 and €345 billion for 2013.

‘And Italy and Spain have funded around 41% of their 2012 requirement.’

These two countries are not even halfway to funding themselves for this year.

So while the news may be good for Greece, you can forget about it. Instead, keep an eye on the Spanish and Italian economies, which are rapidly heading for the mincer.

Instead of denying there are any problems, the Italian Prime Minister should be quoting Bon Jovi:

‘Whooah, we’re half way there
Livin on a prayer
Take my hand and we’ll make it – I swear
Livin on a prayer’

But don’t take my word for it, or Bon Jovi’s for that matter.

Look at the bond yields for other countries: the so-called safe havens of the US, German and French bonds. Recently they hit the following multi-century lows.

The US 10-year bond yield hit a 200-year low.

The German 10-year yield reached a 200-year low.

The French 10-year set a 260-year low.

These are incredible statistics. But the Dutch bond market takes the cake.

The Dutch 10-year yield got to a 500-year low!

When bonds start hitting half-millennium records, you know that all is not well…

These bonds are hitting record lows because some serious amounts of cash are being moved around the markets to prepare for Europe to unravel in the coming months.

But now these ‘lifeboats’ are full and there’s nowhere else for investors to go for safety. Or is there? More on that tomorrow.

Dr. Alex Cowie
Editor, Diggers & Drillers

Related Articles

Market Pullback Exposes Five Stocks to Buy

The Problem With the Spanish Bailout

There’s Good News and Better News for Gold Owners

Why Greece is Just a Side-Show to the Economies of Spain and Italy

By MoneyMorning.com.au

‘We estimate that an area of just one square kilometer [0.39 square mile], surrounding one of the sampling sites, could provide one-fifth of the current annual world consumption of these elements.’ – Yasuhiro Kato, Tokyo University, The Wall Street Journal

We’ll come back to this quote in a moment.

But first…

Today, We’ll talk to you about risk and return.

If you want to be successful in this game and make a lot of money, it’s important you understand it. But it’s also important you understand what effects risk and return.

The payoff for taking a bigger risk is the chance for a greater reward. For adrenaline junkies, chess is a low-risk activity. It won’t get their blood pumping, but they’re also not likely to get injured.

On the other hand, sky diving is high risk. Jumping from a plane at 15,000 feet is sure to set anyone’s pulse going. But the flipside of the thrill is, when compared to chess, there’s a higher risk of an accident.

But some people take the risk because they enjoy the reward – the thrill…the rush.

Investing is similar. Stick your cash in the bank and you’ll get a nice 5-6% return. But you won’t get much – if any – excitement.

Small-Caps Stocks – High Risk, High Reward

The opposite of cash investing is small-cap stock investing. You can rack up gains of 50%, 100% or even 300% in a matter of months. That’s the reward. The risk is the price can zip all over the place – up 10% one day, down 5% another.

If you can handle that kind of action, then small-cap investing is for you.

But what’s that got to do with the quote at the top of this letter?

It’s an example of how the risk and reward for a stock can change overnight.

Take last year’s Japanese discovery of a new deposit of rare earths as an example. It could provide up to one-fifth of the current annual demand. There’s only one problem. The deposit is four kilometres below the Pacific ocean surface.

Last year, rare earths stocks were all the rage. We tipped a couple and investors made good returns. But when our trailing stop order was triggered, we sold out for gains of 192% and 130%.

But big price moves can have an interesting impact on investors. For instance, we tipped Lynas Corp [ASX: LYC] at 50 cents. We sold at $1.46.

Now, if an investor has a price target of $3 on the stock, buying at 50 cents is a great punt. The downside is only 50 cents per share…whereas the upside is $2.50 per share. In other words, the risk reward ratio is 1:5.

But if you buy at $1.46 and the price target is still $3 the risk reward is 1:1. You’re risking $1.50 to make $1.50. Don’t get us wrong, for some stocks that’s fine.

But for a high-risk play like rare earths, betting $1.50 to double your money isn’t great odds.

For the past three years or more, rare earths prices and stocks have traded on the basis of limited supply and China’s near-monopoly on the industry.

But then, out of nowhere a report reveals the discovery of a deep-sea rare earths deposit. So now investors think, “What will that do to the supply, demand and price of rare earths?”

Suddenly the idea of a Chinese stranglehold and ever-increasing rare earths prices doesn’t look so strong.

For prices to go higher the news has to be better and better each time. But with few exceptions, that’s not possible.

Buy Small-Cap Stocks Early

Buying small-cap growth stocks means getting in before other investors know about them.

While this is a high-risk strategy, in one way it’s less risky than buying late. Simply because by the time most investors find out about it, they’re buying into a rising stock and all the known good news is built into the stock price.

But once the momentum stops, it can be tough to get going again: the stock isn’t cheap anymore, so it’s less attractive to small-cap punters, and the momentum has gone so it’s not attractive to momentum investors.

The end result is the stock gets stuck in a trading range, waiting for more news to push the stock out of it.

That’s where rare earths stocks are now.

Right now, at current stock prices investors have seen it all before. It’s just not enough to convince new investors to pay these prices.

Of course, this isn’t unique to rare earths. We’re just using it as an example.

But eventually stock prices fall to a level where they are worth buying.

We’re now ready to take a punt on some beaten-down stocks…stocks we believe are trading at fair price, and where the risk/reward could see you make big triple-digit percentage gains, rather than small double-digit gains.

Kris Sayce
Editor, Australian Small-Cap Investigator

From the Archives…

The Problem With the Spanish Bailout
2012-06-15 – Keith Fitz-Gerald

Australian Housing – How to Avoid This Pauper’s Retirement Trap
2012-06-14 – Kris Sayce

Why Warren Buffett is Loading Up on Tungsten
2012-06-13 – Don Miller

China’s Economic Data Statistics: Just Add Salt
2012-06-12 – Dr. Alex Cowie

Why Graphite is One of the Few Places For Savvy Investors to Make Money
2012-06-11 – Dr. Alex Cowie

Small-Cap Stocks – A Thrilling Risk

By MoneyMorning.com.au

One of the big lessons of the last four years is that state bailouts of banks and bondholders are a bad idea. They usually just make things worse.

All that happens is that the state takes the banks’ debts on to its own balance sheet. You then end up with a sovereign crisis instead of a banking one.

So far, that’s exactly what’s happened to Ireland and Spain. Dublin’s original decision to stand behind the debts of its six major banks seemed like a good way to stop a bank run at the time.

But it ended up wrecking the national finances, forcing the Irish to seek help from the European Union (EU) and the International Monetary Fund (IMF). Similarly, Spain’s decision to bail out its banks with money from the EU has pushed up both debt levels and bond yields.

Now the crisis may be entering a new phase. The new fear is that the German economy and other northern European countries will be made liable for the debts of their insolvent neighbours – the ‘periphery’ countries.

This would come about either through more Spanish-style deals, or through ‘Eurobonds’. Under the latter scheme, countries would be able to issue debt backed by all members. Both of these schemes would increase German exposure to troubled sovereigns.

The German Economy’s Bad Lending Decisions

In a sign that the market is starting to worry about this possibility, the yields on ten-year bunds (German government debt) have risen to 1.5% after falling to as low as 1.17% at the end of last month. The cost of default insurance also rose above 100 basis points at the end of last month, for the first time this year.

Does this mean that Germany’s economy is no longer a ‘safe haven’? Could Angela Merkel even end up begging for a bailout? And what does it mean for you?

It’s hard to feel sorry for Berlin. You can see why ordinary Germans might be annoyed about the idea of bailing out taxpayers (and non-taxpayers) in other countries.

But as we’ve pointed out, it was Germany’s Landesbanken, and other state banks, that made many of the worst lending decisions. German politicians knew this. Instead of dealing with their own banking sector, Germany then tried to get others to pay the bill, browbeating the Irish government (via the European Central Bank – ECB) into maintaining its bank guarantees.

After it was clear that this was not going to work, the German economy then threw good money after bad, with the Greek, and now Spanish, bailouts. If they default, the German state will be liable for its share of the losses on the EU loans.

Paranoia about inflation has also led the Bundesbank to push against interest rate cuts and money printing. This is despite the fact that the annual growth in the eurozone money supply is now only 2.5%.

Ironically, between 1974 and 1997 the Bundesbank had an explicit monetary target that required a much higher rate of growth. This means that Jens Weidmann is trying to get the ECB to be more German than the Germans.

The German Debt Load

The German economy can’t even live up to its own fiscal promises. Even though it has pushed austerity policies as the solution, in turn hammering growth in the eurozone, it is itself still running a deficit. Indeed, it recently admitted that it had missed its own targets for spending cuts.

As the main opposition party has put it: “Merkel dictates sweeping austerity to our European partners, but fails to save in her own budget.” If Berlin has to bail out its own banks, or if a fall in exports sends Germany’s economy into recession, you can expect this deficit to rise further.

This problem is being exacerbated by the challenge of dealing with public sector pensions. As we’ve pointed out, a Freiburg University study has estimated that while British public sector pension liabilities total 90% of GDP, Germany tops the league table with a whopping 360% of national income. This means that the real level of total German debt could be over five times greater than the 81.2% debt of GDP ratio that is usually used.

What does this mean for investors?

Even though a German default is still very unlikely, German debt is certainly not a risk-free investment. Even its relative status as one of the three ‘safe-haven’ sovereign investments (along with the UK and US) is under attack.

Matthew Partridge
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek (UK)

From the Archives…

The Problem With the Spanish Bailout
2012-06-15 – Keith Fitz-Gerald

Australian Housing – How to Avoid This Pauper’s Retirement Trap
2012-06-14 – Kris Sayce

Why Warren Buffett is Loading Up on Tungsten
2012-06-13 – Don Miller

China’s Economic Data Statistics: Just Add Salt
2012-06-12 – Dr. Alex Cowie

Why Graphite is One of the Few Places For Savvy Investors to Make Money
2012-06-11 – Dr. Alex Cowie

The Clipped Wings Economy: How The German Eagle is Grounded With Debt

USDCHF breaks below 0.9478 support and reaches as low as 0.9421. Further decline could be expected after a minor consolidation, and next target would be at 0.9300 area. Initial resistance is at the downward trend line on 4-hour chart, as long as the trend line resistance holds, downtrend will continue.

Daily Forex Analysis

By Central Bank News