Stalling growth

The US Federal Reserve has virtually conceded it will need to provide further stimulus to the economy, despite already near-zero interest rates. An already bloated balance sheet will get bigger as the central bank buys more government securities to try and avoid the dreaded double dip recession that hovers menacingly over Wall Street.

The US is not alone in the slow pace of economic recovery. Even though Germany’s latest quarterly growth data was surprisingly robust, the head of the European central bank says the next few quarters will not be so rosy for the 16 member European Union.

In Japan, a 0.1% increase in GDP in the June quarter has that economy fretting about the possibility of deflation, just as in many other economies. A rising yen is also strangling the export earnings of the world’s third largest economy. The annualised growth rate of 0.4% was stupendously below the median market forecast of 2.3%. The decision now must be what action to take and how much.

The concept of a fresh round of fiscal and monetary stimulus across many nations is becoming the common theme. Consumers have clearly not been convinced by the initial 2009 stimulus packages that varied in efficacy, to venture forth and begin spending money again.

Perhaps foremost amongst consumers concerns are the prospects of keeping a job or even getting one. The 9.5% unemployment rate in the US has been stubbornly stuck at that rate since the removal of temporary hires for the US census collection. Along with the weak housing market, the jobs scene will remain the touchstone of the US economy and whether it is recovering or in need of further help.

Maybe the early signs have already emerged as the past two quarterly reporting seasons in the US have been reasonably good. What has been missing, though, has been enough new capital investment to support taking on new workers. There is still too much spare capacity in US industry to justify such investment, but it will come.

With hindsight, the Chinese economy probably didn’t need to resort to the same stimulus measures that most other countries used. At US$570 billion, the injection was enormous and has certainly created a different set of problems for Beijing than Washington is dealing with today. A year down the track, the Chinese government has been carefully applying the brakes to a runaway housing market and a surging domestic economy generally.

Chinese exports have also been a source of rapid growth, fuelled by the contentiously undervalued yuan. In the year to June, Chinese exports grew 38.1% while imports rose 22.7% creating a US$28.7 billion trade surplus in June, well above the forecast US$19 billion. Chinese annualised trade surplus is now US$172.8 billion. The following chart shows the almost uninterrupted surge in the trade surplus, despite a hefty increase in imports.

This trade data will continue to exasperate US officials as the level of the yuan has barely nudged upwards (just 0.34%) since the June 19 de-pegging from the US dollar.

Whilst doubts persist over the health of the global economic recovery, credit markets are slowly getting back to full health. Members will have noticed a notable surge in M&A activity, particularly in the mining and energy space, as evidence of improving conditions.  BHP’s US$39 billion offer for Canadian fertilizer producer Potash Corporation has been this week’s main event... and 2010’s for that matter also.



Having seen the US$130 per share offer rejected, BHP remains undeterred (the graphic above illustrates to some degree why) and has gone hostile.  The group will attempt to convince Potash Corporation’s shareholders directly that the offer is not undervaluing the company and will also try and sidestep the shareholder rights plan rolled out by the Potash Corporation board as poison pill, designed to make it more expensive and difficult for BHP to gain a controlling stake.

The key dynamic here will be the emergence of any rival bidders. Such a huge offer is only possible thanks to BHP’s bullet-proof balance sheet and means that few have the necessary firepower to compete. However, Brazil’s Vale is sure to have taken note and players in China, underpinned by a thriving economy, have the capability to enter the fray. Add to the mix the upcoming Australian election, the next few weeks will be far from dull for BHP’s shareholders.



Turning to the charts, the FTSE 100 continues to trade in a tight range on low volume. From a technical perspective there are two potential conflicting scenarios currently in play; the first being a bullish inverse head and shoulder reversal pattern that suggests a retest of the 2010 highs. However, given the recent sell off we also look to have completed a bearish rising wedge pattern that would give us a downside target that suggests a retest of the 5,000 level.

We still have no conclusive evidence that makes us favour either scenario, the price action is pinned between support from the 50 day moving average and the inverse head and shoulder neckline support, and resistance from the rising wedge pattern and the 200 day moving average. We have been trading sideways for almost a month in a tight 200 point range on low volume. We really need to see a close 2% below the 50 day or above the 200 day on higher volume before we can infer which direction the market will take for the next few weeks.



Meanwhile, the Dow Jones Industrial Average has now pulled back below its 200 day period moving average (red line) but has managed to find support at the 50 day moving average (green line). However, of some concern is the recent bearish MACD crossover which suggests that the trend may be changing from up to down. Though, it is still too early to tell if this is a shake out of weak longs before a surge higher or the beginning of something more ominous.

A break of the 50 period moving average (green line) could result in a retest of both the 50 day moving average and psychologically significant 10,000 level.



Gold successfully broke out from the bullish continuation flag pattern and the 50 period moving average (green line) at US$1209, surging higher to reach a recent high of US$1229.05 on August 16. We have also seen a break of the RSI downtrend and a positive MACD crossover which has now been confirmed with the bullish move back above the zero signal line.

A continuation of the current move higher could potentially mark the end of the short term weakness seen during mid June to the end of July. Should this scenario play out, we have an initial upside target of the June 21 high of US$1,265. On the flipside, should Gold retrace from current levels, downside support is located at the 200 period moving average (red line) at US$1,157.