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.

For Australia, however, the on-going surge in demand for raw materials is an absolute godsend. The Australian Bureau of Statistics data shows that Australian exports to the US now account for less than 5% of total overseas shipments in the year to June 2010. Exports to the European Union accounted for 8% in the same period. No prizes for guessing then, that the Asian region accounted for 72% of Australia’s exports in the last financial year.

Australia’s shipments to China increased 17% to A$46 billion and now represent about one quarter of our total exports.

From Australia’s perspective then, as long as China’s growth remains robust enough to support the huge demand for iron ore, thermal and coking coal, LNG and other natural resources, it will buffer the Australian economy until the rest of the world can recuperate.

Australia meanwhile, may have dodged a bullet with the watered down mining tax supplanting the badly thought out Resources Super Profits Tax. The modified version does not help the smaller end of town but it certainly seems neutral enough for the bigger players to get on with life. Projects from Xstrata and Rio Tinto that were previously threatened under the RSPT have been reinstated. More importantly, the perceived damage from increased sovereign risk has abated sufficiently that it is no longer making global headlines.

The Reserve Bank of Australia is still ringing the bell on the terms of trade, which is again approaching the high levels of late 2008. There is a big list of major projects that have begun ($43 billion Gorgon LNG) or are close to beginning that will sustain investment in the resources sector for several years. If the associated infrastructure investment can keep pace, Australia’s export earnings will continue to be our lucky charm.

In the wider Australian economy, the June year reporting season is underway with a mixture of good and not so good results. Importantly, the Commonwealth Bank’s annual profit showed the broader financial sector was likely to be in rude good health.

The Australian Federal election has brought out a mish-mash of policy statements and spending promises. It does not seem to matter a great deal which party wins office this weekend as the economy seems to be taking care of itself.

Turning to the charts, the 50% Fibonacci retracement capped the recent upward move, working in confluence with the psychological 4600 resistance level. This resulted in a sharp retracement to test the 23.6% Fibonacci retracement at 4376.16. The ASX200 has bounced off this level and is currently testing the 50 period moving average (green line) at 4443. A convincing break above this momentum indicator should result in a move towards the 38.2% - 50% Fibonacci retracement region.

However, the 'inside day' formed on August 16 is a sign of indecision, which suggest a downward move is just as likely. A successful breach of the 23.6% Fibonacci retracement level would see a test of the 4175.70 - 4182.30 support zone. The weakening RSI and negatively crossed MACD are suggestive of a switch of momentum to the downside. Short term weakness remains the medium term play.

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 23.6% Fibonacci retracement 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$1227.45 on August 16. A sustained 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, the potential upside is back towards 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$1,155.