Moneycorp: Financial stability report rattles investors [17/12/2010]

Moneycorp: Financial stability report rattles investors [17/12/2010]

– Two agreements from the EU summit
– More expected

Good morning. For anyone who has wondered how technical analysis works, here is an brief example of the Japanese way of doing things, published by Bloomberg this morning:* “The euro may encounter a big move against the dollar at the beginning of 2011 based on ichimoku chart analysis, according to Mizuho Securities Co. The ichimoku chart shows convergence of the A and B senkou span lines, compressing the kumo at around the $1.36 euro per dollar level [sic] on around 31 December. Ichimoku analysis is used to predict a currency’s direction by analyzing the midpoints of historical highs and lows. The kumo refers to the area between the first and second leading-span lines and is used to show an area where buy orders may be clustered. A big move tends to occur around a twist of an ichimoku kumo. Ichimoku theory doesn’t say which direction such a big move will take, though an easing of tensions relating to the European debt crisis may help the euro to strengthen.”

So there you have it. If the EU can sort out its problems the euro will go up. Or down. Technical analysis at its brilliant binary best.

Looking on the bright side for the euro, the summit meeting in Brussels has already reached two agreements. A German diplomatic source said EU leaders will amend the Lisbon treaty “to create a permanent stability mechanism that would allow governments to safeguard the euro in the event of a crisis”, which would come into being in mid-2013 (the stability mechanism, not the crisis). Another agreement, according to Luxembourg prime minister Jean-Claude Juncker, is that “there will be no enlargement and deepening of the volume” of the €440 billion European Financial Stability Facility (EFSF). President Herman Van Rompuy let it be known that the EU would do “whatever is required” to protect the euro, presumably as long as it doesn’t involve topping up the EFSF.

Investors seem to be guardedly optimistic that two days of negotiation will produce something worthwhile in Brussels, even if they are not yet clear what it may be. After three days on the retreat the euro moved tentatively higher against the US dollar on Thursday, albeit only to the tune of little more than half a cent.

Sterling is marginally higher against the US and Canadian dollars as well. It is approximately unchanged against the euro, the antipodean dollars, the rand and the yen. Only against the Swissy is it appreciably lower, by about a cent. Investors were content with the 0.3% monthly increase in UK retail sales because it was in line with forecasts and the second positive figure on the trot. It helped that the previous month’s 0.5% gain was upgraded to 0.7% and that the 1.1% annual rise was ahead of the 0.7% the market had been expecting. The figures did not do a great deal for the pound but they were enough to keep its head above water.

The European data were restricted to consumer price index inflation. It was precisely in line with the 1.9% everyone had been looking for and so had no bearing on the proceedings. In the States it was a similar story. Housing starts, building permits, initial and continuing jobless claims were all fairly close to the predicted levels. The Philadelphia Fed’s manufacturing survey was stronger than expected, up by two points at 24.3, but it did nothing for the dollar.

Friday has started badly for Britain. Nationwide’s consumer confidence index is down by seven points to 45 and England has been bowled out for 187. More influential than either of those has been the Bank of England’s half-yearly Financial Stability Report, published this morning. The Bank is not wildly optimistic that Britain’s financial system is equipped to withstand exogenous buffeting. It lists risks attached to “contagion of sovereign concerns” and “a redistribution of capital within the financial system”. The Bank goes on to say that “low yields may also be masking latent distress among some overextended borrowers”. In other words, when interest rates start going up again, some borrowers out there are going to be stuffed, including over-leveraged home-buyers. There was not obviously anything in the report that applies uniquely to Britain but the tone of the document made investors edgy about the pound.

The highlight of today’s data will be IFO’s survey of German business sentiment. Both the business climate and the current assessment are forecast to fall by a fraction of a point. Euroland construction output, the euro zone’s October balance of trade and US leading indicators are highly unlikely to have any bearing on the price of cod.

And that’s the lot. Barring accidents, the best guess for today is that the market will devote its efforts to housekeeping; tidying things up before the imminent festive season smothers all life out of the market. Have a good weekend and don’t forget your crampons.

* The extract has been paraphrased for improved clarity.

Chart

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