Prepare for The Euro Breakout

by Greg Harmon

The Euro has been struggling in a range for some time. From the daily chart below of the Currency Shares Euro Trust, $FXE, the price action has been consolidating in a ‘W’ like pattern, making an Ascending Triangle. This pattern targets a move equal to the biggest part of the triangle on a breakout. In this particular case a $5 move. And with the price holding near the top of the triangle that would target a move to 141.60 on a break higher. The other indicators, RSI and MACD

support this. But what is interesting about this chart is that it did break out, for just a minute, early on Monday, only to be dropped later. Is this a sign that orders were in to buy from Friday that pushed it higher? If the Ukraine situation settles does this mean a break could happen Wednesday? Or by the rate decision later in the Week? It seems primed. But

141.60 may not be the end of it then. A check of the weekly chart shows that the short term break would also trigger a longer term Cup and Handle that targets a move to 152.50. Does that make it more intriguing?

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Bearish Wick in Coffee forming this week? Hot Coffee cooling off?

by Chris Kimble

CLICK ON CHART TO ENLARGE

Coffee has been one of the best assets to own in 2014, up over 50% in two months. Could "Hot Coffee" be cooling off?  Coffee could be forming a bearish wick this week near the 50% retracement level of its three year decline.

The week is far from over and we won't know the true outcome of this weekly pattern until Friday's close. Should this wick remain in place Friday evening, it would be signal that this hot asset could cool off for a while.

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What Needs To Happen Before We See A Big Recovery?

by F.F.Wiley

In a Bloomberg article last May, Caroline Baum summed up the economy nicely in a single question:

Four-and-a-half years of an overnight rate near zero and aggressive securities purchases by the Fed have succeeded in raising asset prices. The question is whether higher asset prices will deliver jobs and economic growth before they become destabilizing.

In other words, will the real economy mend before excessive financial risk-taking kills the patient?

Baum called it a “horse race.”

With 2013′s economic data mostly complete, let’s have a look at where the race stands.

We’ll start by asking what needs to happen before we get the robust recovery that many economists have predicted for the past four years. Our answer is that one or both of two things need to occur:

1. Households need to borrow at the pace we normally see in economic expansions.
2. Household income needs to grow strongly.

Of these choices, the best result would be number 2 with as little as possible of number 1. The worst would be another credit-fueled expansion (more 1 than 2) that feels good for awhile but ends badly further down the road.

But isn’t capital spending the key ingredient?

You may argue we’re missing a third possibility – a capital spending boom. Many claim this is the best way to get things going again. We would say it puts the cart before the horse, at least as far as what’s prudent and realistic.

In America’s consumer-led economy, businesses have no reason to ramp up capital spending unless they expect strong gains in consumption. That seems unlikely. We’ll discuss capital spending in more detail in the future; for now, we’ll point to the economy’s ample unused capacity, tepid overseas growth, growing financial risks and President Obama’s bumbling incursions into private markets. Is this really the best environment for entrepreneurs to launch a capital spending spree? We doubt it.

Okay then, how about credit growth and household income?

We can’t rule out the possibility that the Fed gets the credit boom it’s looking for. But we don’t expect it in the near term for the same reasons that capital spending won’t take off, nor is it predicted by survey data.

Which leaves household income. According to the personal income report released Monday, annual growth in real disposable income jumped to 2.8% in January. Based on this alone, you might conclude that households are flush with cash. However, it’s not unusual for this indicator to bounce around between the end of one year and the beginning of the next due to tax law distortions. We screen out the noise by averaging all December figures with the subsequent January figures and using the average for both months:

As indicated on the chart, real disposable income has been slowing for three years and currently shows no growth at all. We’ll see at least a small bounce next month, since the latest figures are held down somewhat by the 2013 increase in Social Security withholding and small increase in tax rates. There’s also a small effect from the expiration of extended unemployment benefits in January. But these considerations don’t fully explain the downwards trend.

A more important factor is that new jobs are paying poorly compared to the average existing job. Employers are picking up part-timers and low-paid service workers and creating very few “breadwinner jobs.” Therefore, disposable income is much weaker than you would think if you just focus on employment growth.

And not only does the personal income report give us another perspective on the quality of newly created jobs, but it seems to explain the overall economy pretty well. We see the same declining three-year trend in consumption:

And in capital spending:

The remaining components of private domestic demand – housing and commercial construction – are related to supply factors and credit growth as much as household income. Nonetheless, total residential and nonresidential (structures) investment shows a similar pattern to the other charts:

What’s more, demand would be even weaker if households hadn’t compensated for poor income growth by reducing savings:

Conclusions

For all the chest-thumping from policymakers about the declining unemployment rate and increase in GDP growth in the second half of last year, these statistics are easily misread. More telling indicators, such as private domestic demand, haven’t picked up at all. Nor would you expect a robust recovery as long as employers create mostly lousy jobs.

Getting back to Baum’s horse race between the real economy and the risk of financial instability, the real economy seems to be falling behind. Financial risks are growing steadily, as we discussed in “Tracking ‘Bubble Finance’ Risks in a Single Chart.” The real economy, on the other hand, is held back by weak income growth.

Looking forward, it’s worth keeping an eye on the personal income reports and other indicators of employee compensation. We’ll surely see some improvement as temporary effects wash out. But as long as the declining trend remains intact, don’t expect the big recovery that policymakers continue to predict.

Bonus link

For more on why employment growth isn’t as simple as Keynesian economists touting full employment targets would like you to believe, we refer readers once again to Arnold Kling’s PSST theory. Kling builds out an up-to-date variation of Joseph Schumpeter’s theory of creative destruction. He explains why creating sustainable jobs after a bust can be a very slow process.

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Ukraine turmoil hasn't finished with agriculture markets

by Agrimoney.com

Is that it for the Ukraine crisis?

There is hope of containment, at least, with talks between Moscow and Washington over Russia's deployment of troops to Crimea in southern Ukraine.

But that does not mean that the turmoil should be forgotten by agricultural investors, producers and policy makers, even if negotiation can put a lid on the Crimea pressure cooker.

Hryvnia's hard time

After all, Ukraine represented a worry to markets before any balaclava-wearing pro-Russia militia were seen around Balaclava, as protests forced Viktor Yanukovych, the country's president, to flee.

While fears that instability would interrupt logistics and exports have not, so far been fulfilled, with Ukraine's main grain ports such as Odessa a distance from Crimea, that is not the only threat to crop supplies.

Ukraine's farmers, like peers in Argentina, may decide to withhold sales of crops, denominated in dollars, if the local currency, the hryvnia, takes a new lurch lower.

Even if it doesn't, the currency's fall of some 18% this year means farmers already face paying more, in hryvnia terms, for imported needs such as many fertilizers and agrichemicals, which looks like curtailing harvest prospects this year.

Russian trade

Farmers may have to do so with minimal state support too. Although the European Union on Wednesday backed an E11bn aid package to Ukraine, much of that is tied to longer-term programmes, and there are many calls beyond farming on what cash is available immediately.

And all this is before bringing Russia into the equation, and considering what a weakened rouble means for a country already renowned for its keen rivalry in grain export markets.

Russia's dominance in last week's wheat order by Egypt's Gasc authority underlined the even sharper edge to its competitiveness honed by a soft rouble.

Conversely, the rouble retreat bodes ill for Western livestock producers, albeit at a time when meat prices are extraordinarily high, with Russia the top beef importer, ranked second in pork, and a substantial poultry buyer too.

Message to policymakers

But if those are factors for grain producers and traders to consider, there is one for policymakers too.

The flexing of Russian muscles issued a timely reminder of the reliance of many Western nations for energy on countries with somewhat unpredictable, or plain unsavoury, regimes.

Russia, for instance, supplies Europe with more than 30% of its natural gas (about half of which comes through Ukraine).

This kind of dynamic should make authorities in importing countries think twice before going in too hard on the biofuels industry in an attempt to depress food prices. Gaining energy independence, with technologies as carbon neutral as possible, is a strategic benefit.

Sure, food is the priority. But soaring fuel prices can bring nations low too.

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Political Gamesmanship Allows the Stock Market to Morph

By: Anthony_Cherniawski

A political chess game is being played between Putin and the West. Of course, this has sent the futures soaring, but not to new highs…yet. Of course nothing has changed on the ground in the Ukraine.

This gamesmanship has the ability to change the pattern of the markets, as well. Not everyone is confident that the Russians are really backing down. If the market fails to make a new high, then the pattern on the chart will be the correct one.

However, if the SPX makes a new high, then [y]-[x]-[z] becomes [y]. Yesterday’s low becomes [x] and there will be a new zigzag Wave [z]. That’s the nature of a zigzag. It can replicate itself again.

Today and tomorrow are both Pivot days, so it suggests that a new zigzag may be done by tomorrow.

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Kyrgyzstan: The Next Ukraine?

by Tyler Durden

Submitted by Baktybek Beshimov and Ryskeldi Satke via The Diplomat,

Kyrgyzstan was once known for its Tulip Revolution, a name the followed the trend of color-coded revolutions in Georgia and Ukraine. The ouster of the corrupt regime of President Askar Akayev in 2005 gave those Kyrgyz aspiring for a better future cause for hope, but expectations were quickly dampened. Akayev’s successor Kurmanbek Bakiyev suffered the same fate, with his removal from office in 2010.

The Kyrgyz Republic subsequently became the first ever parliamentarian state in Central Asia, normally a bastion of post-Soviet dictatorships. In this part of the world, presidents and their loyalists control politics, along with economic and financial assets. For Kyrgyzstan, the hope was that following two failed regimes in a decade, this novel rule by parliament and the peaceful transfer of power would break the ice of autocracy in Central Asia. Certainly the new leader of the republic—first as prime minister and then as fourth president—Almazbek Atambayev has spared no effort to convey his commitment to democracy.

Yet, like his predecessors, Atambayev has sought to extend his political power, strengthening control over lucrative businesses and persecuting his opponents. Overcoming the old authoritarian traditions has proven challenging. Today, factional infighting for power among the provincial clans and political regionalism continue to set the agenda for this small nation.

Mayoral elections in two major cities in Kyrgyzstan on January 15 have intensified the political divisions in the provinces, with evident hostility from the South toward the central authorities in Bishkek. Atambayev’s protégé stood as the only candidate for mayor of Kyrgyzstan’s capital Bishkek. Suspect elections in the southern city of Osh, where incumbent Melis Myrzakmatov lost despite being the strong frontrunner, only reignited brewing anger at a president who was widely believed to have been involved in hijacking the popular vote. Myrzakmatov’s supporters took to the streets of the city the same day to condemn the outcome. According to local reports, up to ten thousand people attended a demonstration in Osh on January 15. The ousted mayor called for restraint at the protest, urging his electorate base to prepare to use civil disobedience to protest the government. In a country known for electoral fraud, the elections have kicked off another round of political confrontation between the clans. Kyrgyz political factions often mobilize ordinary citizens to undermine government, in what Scott Radnitz called “weapons of the wealthy.”

Indeed, the North-South political divide has only widened in the years since the overthrow of the Bakiyev regime. The fractured nature of the Kyrgyz political field was one of the subjects of Atambayev’s speech in December 2011, when the Kyrgyz leader pledged to bridge the differences. Yet the dubious outcome of the Osh elections suggested he has made little progress on that front.

Protests in Kyrgyzstan are commonplace, with 782 in 2013 alone, a staggering number for a tiny republic. But the most volatile part of the country remains the South, where large-scale ethnic conflict exploded in the summer of 2010. In contrast to the North, the poverty-stricken provinces of Osh, Jalal-Abad and Batken are highly dependent on the cross-border trade with neighboring Uzbekistan and Tajikistan. One of the biggest markets in Central Asia is the Kara-Suu bazaar located near the city of Osh, in the Ferghana Valley. According to an OSCE report from 2011, trade between these southern provinces and neighboring states including China plays a major role in the social and economic development of the volatile Ferghana Valley region. Nonetheless, Kyrgyz Ministry of Labor, Migration and Youth statistics for 2012 show that unemployment in Kyrgyzstan is highest in the South. The central authorities in Bishkek and Atambayev have played little role in the politics or social development of the region, where disregard for central government is widespread.

Nevertheless, it would be inaccurate to blame the country’s struggles entirely on old Kyrgyz political traditions. The current political chaos is also an outcome of the Kyrgyz leadership’s policies. Atambayev is the most pro-Kremlin figure among Central Asia’s leaders today. At his personal initiative, Russia has monopolized the Kyrgyz Republic’s energy, defense and transportation industries. The entire national gas supply system (admittedly debt burdened) was sold to Russia’s giant Gazprom for $1 dollar. RusHydro took the lion’s share of the Kyrgyz hydro energy company, and Rosneft is in the process of acquiring more than fifty percent of Manas International Airport, which had been leased by the U.S. and NATO member states after 9/11. Atambayev took a step further when he extended the Russian military airbase presence, hoping to rearm Kyrgyzstan’s military with the help of Russian President Vladimir Putin. This appeared to be more an act of despair than a carefully defined strategy. Consequently, Kyrgyzstan failed to reform its judiciary system, where anti-corruption campaigns mired in constant controversy add to government dysfunction. The Kyrgyz Republic’s desperate economy has low export capacity, lacks foreign investment and depends on remittances from migrant labor working in Russia. With bleak economic prospects, Atambayev has accelerated Kyrgyzstan’s shift towards Russia to secure his own political future. This has left him walking a fine line between the sovereign interests of Kyrgyzstan and the neo-imperial policy of the Kremlin.

Ultimately,  the Kyrgyz Republic’s transformation into a Russian client state and military bulwark is bad news for Uzbekistan and Kazakhstan. Not surprisingly, Kazakh leader Nursultan Nazarbayev has openly expressed his opposition to Kyrgyzstan’s joining the Customs Union, with its special privileges and concessions. The Uzbek president added that the unequal distribution of the water resources of Central Asia could spark conflict, specifically over Russian joint hydro energy projects planned in upstream states, Kyrgyzstan and Tajikistan.

Naturally, all these external grudges have engendered domestic discontent. What has taken place in the Ukraine may perhaps embolden factions of the Kyrgyz opposition to move against Atambayev and what they see as his excessively pro-Russia policy. However, given Moscow’s extensive historical influence in Kyrgyzstan and the large presence of Kyrgyz laborers in Russia, support for a shift away from Russia does not seem widespread. More likely, the next regime change in Kyrgyzstan will be the result of a factional split and regional divisions.

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