Email of the day
"I have just done a run through of Financials/Banks and the developing picture is concerning. Euro Banks appear to be in a clear downtrend with many Asian Financial/Bank indices also beginning to trend down with MA200 recently turning down. US Financials/Banks appear to be OK at present but with deterioration in Europe and Asian financials it must be considered that they will be next. Would be interested in your thoughts, if you can do a run through of Financials / Banks."
Eoin Treacy's view Thank
you for this informative email. A great deal of uncertainty persists as to the
condition of peripheral Eurozone economies and just how much of their debt northern
European banks hold. This well-reasoned article
from the New York Times blog, kindly submitted by a subscriber, may also be
of interest. Here is a section:
Still, the notion now gaining ground among impatient traders - that the central bank has become a toothless symbol of Euro-stasis too fixated on inflation - may also be overdone.
In fact, it was the European Central Bank, much more than the Bank of England, that was an aggressive lender of last resort during the banking crisis in 2008, making more than 700 billion euros available to liquidity-starved banks in the euro zone.
Moreover, the commitments made in 2008 by Germany, France and other countries that they would not allow their major banks to fail remain in place, with varying levels of deposit insurance as well.
Paul De Grauwe, an economist based in Brussels who advises the president of the European Commission, José Manuel Barroso, disputes the view that the divergent euro zone system prevents governments from acting on their own as a guarantor of last resort.
Mr. De Grauwe cites the example in 2008 when the Belgian National Bank - and, by extension, the European Central Bank - accepted highly questionable collateral from the collapsing Fortis Bank for new credit, with any losses being taken by the Belgian government.
"This was the condition imposed by the euro system on the lender of last resort function exerted by the national bank," he said. "This technique has been used in other countries in the euro zone, and it ended the bank run."
But the big question now is whether the amount of dubious euro zone sovereign debt being held by European banks is so large - perhaps as high as 1 trillion euros - that it threatens the ability of even a country as financially sound as Germany to make good on such promises.
At Fullermoney we tend to put a great deal of emphasis on the performance of bank sectors because they so often lead. There role in credit expansion and contraction means that the sector has to at least perform in line with the wider market for a major bull market to unfold. Right now the performance of global banking sectors are useful barometers for investor sentiment. (Also see my comment yesterday on the TED spread)
The Bloomberg World Banks Index lost momentum from October, having doubled, and had unwound its overextension relative to the 200-day moving average by March. It failed to sustain the break to a new recovery high in April and dropped below the February lows last week. It is oversold in the short-term and has steadied somewhat, but the technical deterioration is such that a sustained move above 115 is now required to lend credence to the medium-term bullish hypothesis.
The S&P500 Banks Index has pulled back to test the upper side of the August to March range and the 200-day moving average. The Index has steadied somewhat over the last week but needs to hold above 135 if the medium-term uptrend is to remain broadly consist. The KRW Regional Banks Index has been a leader. It pulled back in a sharper manner than the larger banks index and is also steadying in the region of the 200-day MA. It needs to rally from here and importantly hold above 47 to support the medium-term bullish hypothesis.
The S&P/TSX Financials Index has pulled back to test the upper side of the previous trading range and the 200-day moving average. A sustained move below 1475 would be required to break the progression of rising reaction lows and question the broad consistency of the advance.
The FTSE-350 Banks Index has been rangebound for 10 months and is now testing the lower side. While recent trading activity has a distinct downward bias, a sustained move below 4350 would be required to indicate a return to medium-term supply dominance. The Swiss Banks sector has a relatively similar pattern.
The Dow Jones Euro Stoxx Banks Index remains in a relatively consistent 9-month downtrend. While it is becoming increasingly overextended relative to the 200-day moving average, the Index continues to post new reaction lows and a sustained move back above 175 would be required to question the consistency of the decline.
The Bloomberg Asia Pacific Banks Index, which is heavily weighted by Chinese, Australian and Japanese institutions, broke below the February lows last week and would need to sustain a move back above the 200-day moving average to indicate a return to demand dominance. The Bloomberg Asia Pacific Diversified Financials has had a deeper technical deterioration and needs to break the progression of lower rally highs to check downward momentum beyond a brief pause.
The Topix Banks Index has been attempting to form a base above 125 since October 2008 and has recently pulled back to test the lower side of the range. An upward dynamic, similar to those posted when this level has been tested previously, would be required to indicate demand is returning.
The S&P/ASX Finance Index paused near the February lows but broke downward last week. It needs to sustain a move back above 4600 to offset scope for some further deterioration.
The Korean, Taiwanese and Singaporean sector indices all have a similar pattern; testing their February lows. Upward dynamics are required to indicate demand is returning in the region of this potential area of support. Sustained moves above their April highs are needed to reassert their medium-term uptrends.
The Indonesian Finance Index pulled back sharply from its late April high but found support in the region of the upper side of the prior range today and a sustained move below 300 would be required to question the consistency of the medium-term uptrend.
The Bombay Banks Index has been performing more or less in line with the wider market. It failed to sustain the upward break in April and has pulled back into the previous range in a major trend inconsistency. It is now testing the psychological 10,000 and needs to hold above 9200 if the progression of rising reaction lows is to be sustained.
The Thai Banking Index lost momentum in the region of the 2007 highs from October and has now pulled back to test the 200-day moving average and the progression of rising reaction lows. An upward dynamic is required to indicate demand is returning to dominance.
The S&P/Citic300 Financial Index remains in a medium-term downtrend and while it has steadied in the region of 3000, a sustained move above 4000 is needed to break the progression of lower rally highs and indicate the bulls have regained dominance. The Hang Seng Financial Index has a relatively similar pattern.
Russia's Sberbank encountered resistance in the region of $3 from January, broke its progression of higher major reaction lows earlier this month and pulled back below the 200-day moving average last week. It needs to sustain a move back above $2.50 to question momentum beyond a brief pause.
Banco Itau of Brazil encountered resistance in the region of BRL40 from December, fell back below the 200-day moving average last week and while it has rallied somewhat this week, it needs to sustain a move back above BRL36 to question scope for some further weakness.
The above banks and sector indices illustrate the heightened level of anxiety in the global financial sector. Even the most consistent performers such as the Indonesian or Canadian markets have pulled back sharply. The Eurozone and Chinese sectors remain some of the weakest globally and are somewhat overextended in the short-term, so some steadying is a reasonable expectation. However, they will need to sustain meaningful rallies if the large cohort of bears are to be pressured and shorts closed.
A large number of other indices are at potential areas of support; at either their 200-day moving averages or progressions of rising reaction lows. If they can manage to sustain rallies from these levels then the broad consistency of the medium-term uptrends will remain intact. If they fail at these levels, they will offer increasingly stiff headwinds to their parent indices.