567 euro financial forecast june 2014

8/10/2019 567 Euro Financial Forecast June 2014

http://slidepdf.com/reader/full/567-euro-financial-forecast-june-2014 1/10

Elliott Wave International, Inc. • www.elliottwave.com

P.O. Box 1618 • Gainesville, GA 30503 USA • 770-536-0309 • 800-336-1618 • FAX 770-536-2514

June issue

© June 6, 2014(data through June 5)

BOTTOM LINE

The DAX is nearing the end of a rally since at least September 2011, while the FTSE 100 is placing the final

subwaves of its own terminal advance. A reversal in these two bullish holdouts will complete the Continent-wide

topping process that’s been more than a decade in the making. Yesterday, the ECB introduced a negative deposit rate

of -0.1%, effectively charging banks to park their cash at the central bank overnight. Most people see this measure

as a proactive effort to avert deflation, but as shown above, the trend toward deflation has been a reality in Europe

for well over two years. Once again, central banks are merely reacting to economic weakness that is regulated by

naturally occurring waves of social mood. Their latest effort to stop the trend will fail — just as their dozen or so

previous efforts did.

THE STOCK MARKET

On both a short-term and a long-term basis, stocks are poised to roll over in the third and final leg of their 15-year

topping process.

Europe’s Bailout Era Moving into Depression Era

Despite the market’s near-term levitation act, the next chapter of Europe’s economic and social story is now

clearly being written. On May 26, the Financial Times reported on the 2014 European parliamentary elections this

way:

e60246



The European Elliott Wave Financial Forecast — June 6, 2014

2

Ukip and France’s FN Lead Europe’s

Populist ‘Earthquake’The UK Independence party and France’s

far-right Front National stormed to victory in

European elections last night, as populist and

nationalist parties across the continent dealt a

heavy blow to the European project.

Indeed, it’s been a long, strange trip over the past

15 years, but also a remarkably predictable one.

This chart of the Euro Stoxx 50 index shows the

Continent’s twists and turns beginning at the very

point of maximum optimism in 1999, when the

European Union launched its common currency

and cleared the way for expansion to the east.

That year, The Wave Principle of Human Social

Behavior observed that the European Union was

consummated after 1,500 years of repeated conflict

in the region and it identified the “multiyear pageant of apology, concession and agreement”

as “consistent with [the] Elliott wave case that an

uptrend of Grand Supercycle degree is ending.”

Stocks’ initial drop and then their partial recovery

in the early-2000s (second bracket) failed to dampen

the Continent’s expansionism. As shown, during the

Expansion Era, the EU extended its influence to 12

new territories — primarily republics of the former

Soviet Union — during the stock market’s run-up

into 2007. Europe’s welcome beacon began to flicker

only after the 2007 peak, when European CommissionPresident Jose Barroso welcomed the final two

countries (and, by all accounts, the two poorest) into

the Union: Romania and Bulgaria. As the third bracket

shows, economic turbulence began shortly thereafter,

as a succession of sovereign debt crises, bankruptcies

and bailouts hit southern Europe in 2010; they more or

less continue to the present day.

Still, despite the Euro Stoxx’s 41% drop since its

March 2000 all-time high, Europe has thus far averted

the era of deflation and depression that a generational

stock market decline implies. But economic andsocionomic imperatives can’t be put off forever. As

Bob Prechter put it in January 2014, “When positive

mood arises, the stock market turns up, the economy

improves and society becomes productive and safe.

ANNOUNCEMENTS

We are aware of the saying, “The coldest winter I ever spent was a summer in San Francisco,” but Steven Hochberg still

plans to go there August 21-23 to speak at the 2014 San Francisco MoneyShow. You can be there, too, to get EWI’s

current market forecast and talk with Steve about investment issues that matter most to you. Registration is free, so reserve

your seat now by visiting www.elliottwave.com/wave/SanFranMS1408 .

New: Where can you go to get insider news about EWI before anyone else does? Or how about special lessons on how

to trade using wave analysis? It’s all yours, and it’s free. Look for the new feature, For Subs Only, at the top right-hand

corner of your MyEWI home page.

Learn to execute trades more successfully with our just-released Trader’s Classroom Collection, Volumes 1-6. This new

comprehensive eBook series includes 79 lessons that cover virtually every real-life scenario you will encounter as an

active Elliott wave trader. Order by June 18, and you will also receive four Bonus Video Lessons. Learn more now at

www.elliottwave.com/wave/1406TC .

e60246

http://www.elliottwave.com/wave/SanFranMS1408

http://www.elliottwave.com/wave/1406TC

http://www.elliottwave.com/wave/1406TC

http://www.elliottwave.com/wave/SanFranMS1408




3

When negative mood arises, the stock market turns

down, the economy deteriorates and society becomes

destructive and dangerous.” If the dangers lurking for

the European project were murky before, they should

be crystal clear after last Sunday’s parliamentary

elections. Here are some highlights:

• Britain: The UK Independence Party (Ukip) won

with 28% of the vote. It’s the first time since 1906

that a party other than the Conservatives or Labour

have won a national election. (FT, 5/27/14)

• France: The far right, eurosceptic National Front

won with 25% of the vote, taking 25 of France’s

74 seats and setting up party leader Marine Le Pen

for a presidential run in 2017.

• Denmark: The anti-immigrant, eurosceptic

Danish People’s Party won with 27% of the vote,

becoming the third largest eurosceptic party in parliament behind Ukip and National Front.

• Spain: Podemos (“We Can”), a political party that

organized just three months ago, won five seats

and 8% of the vote on a platform of revoking or

curtailing the Treaty of Lisbon, which centralizes

EU power.

• Greece: The left-wing party, Syriza, won with

27% of the vote, immediately calling for national

elections. The neo-Nazi Golden Dawn took third

place, winning more than 9% of the vote.

Overall, populist parties will make up at least 30%

of the new European parliament, with eurosceptic

members more than doubling. Right on cue, then,

voters are throwing out the leaders they associate

with the old trend, and electing new leaders whose

policies align with the new mood. Tellingly, too, the

lone stronghold for European centrists was Germany,

where the “pro-European center ground held firm.”

(Reuters, 5/25/14) Mainstream parties benefit when

positive mood arises, so the results reflect the DAX

index’s 22% climb since March 2000, which has far

outperformed European stocks as a group.

As for economic deterioration, the charts of

submerging consumer price growth on page 1 beg

to differ with a famous hedge fund manager, who

recently stated, “[T]he deflation that keeps central

bankers awake at night is less likely than an asteroid

hitting the earth.” In fact, price deflation is either here

right now, or it’s dangerously close. On May 8, ECB

president Mario Draghi “dropped his broadest hint

yet” (Guardian, 5/8/14) that the central bank would

move to tackle the risk of deflation. Yesterday, Draghi

made good on that promise, going “where no central

bank has gone before” (FT, 5/31/14) and cutting

the ECB’s deposit rate from zero to negative 0.1%.In other words, the ECB now effectively charges

banks to park their cash overnight at the central

bank. In a stunning U-turn, Germany’s notoriously

conservative central bank also just blinked, expressing

its willingness to support the ECB’s “aggressive, and

in some cases unprecedented” (WSJ, 5/13/14) steps

to combat spiraling deflation. The reason is, deflation

is not only afflicting the economic basket cases that

surround southern Europe, but it has also reached the

developed nations like Germany and France that fuel

Europe’s economic engine. The Continent’s already

weakening fundamentals have now merged withanti-free market politicians, whose policies will only

weaken them further. It’s a toxic mix that will govern

Europe’s political, economic and social structure for

years to come.

Elliott Wave Analysis

As shown on the monthly DAX chart below, German

shares have traced out a three-wave rally since March

2003, labeledW-X-Y. A smaller-degree three-wave

rally has also transpired since March 2009, which

e60246




4

we are labeling waves (A)-(B)-(C) of

Y. Within that rally, wave (A) peaked at

7442 in February 2011, after prices more

than doubled off their financial crisis

low; wave (B) was the sharp downward

correction that transpired in the fall of

2011; and wave (C), which has been underway since late 2011, comprises five waves

up at Minor degree.

The entire pattern forms a well-defined

double zigzag (see Elliott Wave Principle,

p. 43), which is essentially two A-B-C

rallies separated by an intervening

pullback. If stocks move higher, the

marks at the top right corner of the chart

on page 3 denote two potential wave

relationships where the uptrend might

end. However, the more important facet ofthis chart is that when the five-wave rally

from September 2011 ends, it will also

complete Intermediate wave (C), Primary

waveY and Cycle wave b. That multiple

degree ending will lead to a protracted

long-term decline in wave c.

At right is a closer look at the subdivisions

of the current rally. The April 2014 EFF

showed a version of this chart and stated,

“The DAX should [complete Cycle wave b]

with a quick upward push in wave 5 of (C) ofY.” Prices fulfilled that forecast last month,

as wave 5 pushed above 9794, the Minor

wave 3 high. Moreover, prices carried near

the top line of a parallel channel formed by

the advance. Optimism has pushed a host of

sentiment measures to new multiyear extremes

(see Market Psychology), so conditions remain

ideal for a terminating advance.

The FTSE 100 pushed to an intraday high

of 6895 on May 15, just 56 points shy of its

December 1999 all-time high of 6951. Asshown, the rally conforms well to the tenets

of an ending diagonal (see EWP, p. 37),

which is a specific type of wave that serves to

terminate the larger trend. The pattern’s near-

term subdivisions are open to interpretation;

however, momentum remains weak, and the

FTSE’s choppy, overlapping wave structure

strengthens our view that stocks are ending a

long advance.

e60246




5

As discussed last month, prices will encounter

technical support at the trendline that extends back to

the March 2012 peak (see last month’s EFF for a chart

and discussion). A five-wave decline that penetrates

this support line — currently around 6542 — will

confirm the onset of a protracted bear market. Our

European Short Term Update editor, Chris Carolan, istracking the FTSE’s daily and intraday swings. If the

anticipated reversal begins this month, he should be

able to identify it in real time.

Market Psychology

Today, at the tail end of Europe’s third big mood peak,

it’s no surprise to see both amateur and professional

investors overpaying for the opportunity to own

stocks. Last month, we illustrated the overconfidence

of everyday investors, who are now paying more for

shares relative to company earnings than they did at

the most exuberant point of the global stock market

mania in 2007. (See page 4 of the May 2014 EFF for a

chart of P/E ratios in the Euro Stoxx 50 index.)

This May 19 Financial Times graph shows that the

level of professional incaution is also off the chart.

Notice that private

equity firms paid an

average price that is

equivalent to 10.4

times earnings for

European leveraged buyouts (LBOs)

in 2014. That’s

also more than

the 9.7 multiple

that marked the

salad days of the

worldwide credit

bubble in 2007. At

an average 9.2 times

earnings, prices for

U.S. deals are also

approaching their2007 peak.

The lower line on

the chart shows

that European LBO

volumes remain

stuck at the same

moribund levels

that have plagued the industry for six years. So, private

equity groups are vying for an increasingly shallow

pool of deals, and they’re paying top dollar to dive in.

The trouble is, a social mood downturn actually inflicts

double damage on the LBO industry, because buyout

firms take over their targets using debt that’s secured

on the acquired firm’s assets. Overconfidence not only pushes firms to take on more debt than they otherwise

would, but also the rampant optimism surrounding a

mood peak drives firms to overvalue the very assets that

back their loans. “Twelve times is the new 10 times,”

says one Rothschild banker, adding that paying 13 or

14 times earnings for quality assets is customary these

days. (FT, 5/19/14) Once mood peaks and stock losses

develop, liquidity will evaporate. The resulting trauma

should paralyze LBO businesses for years.

Here’s another sign of rampant, debt-fueled speculation:

Entrepreneurs Top Buyout Firms on

European Leveraged Deals

Tycoons, Wealthy Families Take Advantage

of Cheap Financing

—Wall Street Journal, May 22, 2014

For the first time in more than a decade, European

entrepreneurs are now beating private equity firms at

their own game. Citing data from S&P Capital IQ, the

Wall Street Journal reports that wealthy families have

borrowed nearly €7 billion in leveraged loans in 2014,

eclipsing the €5.5 billion that large buyout firms have

raised. (WSJ, 5/27/14) The article discusses two of

the major players in Europe’s leveraged loan business:

Germany’s billionaire Reimann family, for example, just

announced it will use $10 billion of leveraged finance to

merge two of its coffee businesses. Before that, French

billionaire Patrick Drahi arranged $22 billion of euro-

denominated and dollar-denominated junk bonds to buy

the French mobile-phone unit, SFR.

Last month, we discussed Drahi’s cable company,

Numericable, and the company’s record-shattering

$10.9 billion sale of junk bonds. Record-setting junk bond deals cluster tightly around the 2007 peak in

stocks, and – lo and behold – another cluster has

formed today. Somehow, the illogic of loading up on

junk bonds simply becomes irresistible at a peak in

social mood. As a London-based buyout advisor tells

the FT, “It feels like we are in the relatively early

stages of the next investing cycle.” As usual, however,

things look quite different through the lens of Elliott

waves and crowd psychology. Indeed, the run-up in

c o u r t e s y F i n a n c i a l T i m e s

e60246




6

LBO prices, combined with investors’ appetite for

more deals, can mean only one thing: The financial

universe has actually reached the late stages of the

last investing cycle, and a new cycle is about to begin.

In this environment, most of the deals that are doling

out tremendous profit today will fall into a seemingly

endless pit of financial loss.

So What’s the Big Deal?

Of course, junk bonds and LBOs aren’t the only

financial products that are attracting aggressive bids.

In today’s euphoric environment, money has become

no object, and prices on a wide variety of assets are

moving in a dangerous upward price spiral. After

more than a decade of failed negotiations over price,

Russia’s Gazprom just announced a $400 billion

deal to supply China with natural gas for the next 30

years. “We don’t have a contract like this with any

other company,” Gazprom CEO Alexei Miller told the

Russian media last month.

A pair of prospective deals in Europe’s leading stock

exchanges also carry the potential to make history.

Intercontinental Exchange Group (ICE) is preparing

a €1.5 billion initial public offering of the European

exchange, Euronext, while the Financial Times reports

that the London Stock Exchange (LSE) just entered

exclusive talks to buy U.S. index compiler Russell

Investments. Sources value Russell at $3 billion, which

would represent the largest deal in the LSE’s 213-yearhistory.

Even last month’s failed attempt to create the

world’s largest drug company displayed the kind of

aggressive bidding that typifies a mood peak. Shares

of AstraZeneca dropped 15% last month, after the UK

drug maker rejected a £55-per-share buyout offer from

its U.S. competitor, Pfizer. The rebuke ended a nerve-

racking month of negotiation, as Pfizer raised its initial

offer from £47 per share to £50 per share on May 2,

and then raised it again to £55 on May 18. Despite this

price, representing a 45% premium over the company’s pre-offer share price, AstraZeneca’s directors held fast

and Pfizer officially scrapped its offer late last month.

Like stock investors, company directors are gambling

on a perpetual cycle of escalating prices. Given the lofty

position of stocks and social mood, prices have probably

already bumped into another ceiling.

Financial Capitals Flame Out

One of the more identifiable characteristics of an

overblown bubble occurs when observers recognize

yet disregard the evidence of an impending trend

change. The March 2000 Elliott Wave Financial

Forecast dubbed it the “uh-oh effect,” as investors see

the risks approaching, yet their optimism preventsthem from taking action. A particularly ominous

version of the uh-oh effect just showed up in last

month’s London Crane Survey of office construction in

the capital city. According to the survey, “risk appetite

amongst the Chief Financial Officers of the UK’s

largest firms rose to a six-and-a-half-year high in the

first quarter of 2014,” with 71% of CFOs reporting that

“now is a good time to take risk on to their balance

sheets.” The press also largely applauded the survey’s

findings. On May 21, the Financial Times jubilantly

reported that office construction in central London

was nearing its pre-recession level, adding, “London’sskyline is dotted with cranes as 64 offices with a total

space of 9.2m square feet — equivalent to 15 new

versions of the Shard, Europe’s tallest building — are

constructed.”

However, discovering the report’s underlying bearish

message required only the most superficial digging.

Here, for instance, are four of the report’s key findings:

• Office construction in London is actually down 5%

over the past six months.

• Of London’s six submarkets — the City, West End,

Docklands, Midtown, Southbank and King’s Cross

— the survey recorded just 15 new construction

starts, the lowest level since 2010.

• Just one new construction start occurred in central

London.

• The only two markets to see a rise in construction

levels were the West End and Midtown.

Meanwhile, that statistic of 9.2 million square feet

under construction? It turns out there is quite a bit

more to that story, too. The following chart and

analysis put the figure into its historical perspective

(wave labels and emphasis added):

Despite the growing strength in the capital’s

economy, new space under construction is at its

lowest level for one-and-a-half years. Not only

is the current level of construction relatively

e60246




7

modest, it comes after nine previous surveys in

which we have recorded activity below the long-run

average of around 10 million sq ft .

—London Crane Survey, May 2014

Across the pond, Bloomberg reports that Manhattan

condo prices just dropped the most in more than three

years, while the owners of One World Trade Center just

cut asking rents to $69 per square foot, as “no private

office tenant has signed a lease ... in nearly three years.”

(5/30/14) So, London’s real estate weakness can be seen

in other financial capitals, as well.

Of course, credit is the one bubble that enables all the

others. On that score, the stealth cash crunch that EFF

discussed in February 2014 is starting to make some

noise. At its April 29 peak, the three-month Euriborrate has nearly doubled over the past year and a half.

Three-month Eonia, another gauge of near-term bank

liquidity, has jumped fivefold since its equivalent low in

December 2012.

Meanwhile, the credit stress developing at the short

end of the yield curve is starting to sneak its way out

into long bonds. Look at these 10-year bond spreads

in Greece and Portugal — two economic basket cases

that precipitated Europe’s most recent credit crisis —

as well as Austria and Slovakia, two newcomers to

the insolvency game. On May 15, Greece’s 2% bondmaturing in February 2024 underwent its biggest sell-off

since the treasury issued the securities in March 2012.

On that day, investors also sold Italian and Spanish debt

(not shown), driving yields to their largest single-day

spike in nearly a year. Meanwhile, the spread between

Austrian and German debt more than doubled in just

the past week. As one London-based fund manager

put it, “You only know how wide the door to the exit is

when there are a few of you trying to push through at

the same time.” (Bloomberg, 5/19/14) Some of these

spreads have since narrowed, but if you’re still playing

the boom in speculative European debt, go ahead andsaunter over toward the exit now. Once the bedlam

begins, you won’t be able to close your positions as

efficiently as you may like.

MARKET SPOTLIGHT

Two more key markets underwent important reversals

in May. The following chart shows the Athens

Composite Index, where we believe a high-probability

bearish opportunity has developed. To understand

why, first recall the wave structure and accompanying

sentiment that surrounded the ASE’s major bottomin June 2012. At the time, 10-year Greek bond yields

were north of 25%, and pundits everywhere called

for the country’s imminent return to the drachma.

That month, EFF discussed the outbreak of gloom

surrounding Greece’s parliamentary elections and

identified a complete five-wave decline in the Athens

Composite. Said the June 2012 EFF, “[O]ur best

interpretation is that Primary wave3 bottomed last

month....”

e60246




8

It’s been a great run, with shares nearly tripling since

their June 2012 low. This updated chart shows that

it’s time to step aside from a bullish position. For

one thing, the rally remains a fourth wave, which,

by definition, may not enter the price territory of

wave (1), according to Elliott’s rule of wave formation

(see EWP, p. 21). So, the ASE’s upside is limited to1458 under the preferred wave interpretation. Second,

a textbook five-wave decline just developed on the

daily chart (see inset), implying that the ASE’s one-

larger degree trend, wave5, is now down. Equally

important, sentiment toward Greece has turned

positively optimistic, with Greek bond yields falling

from more than 35% at the height of the country’s

debt crisis to less than 6% earlier this year. As investor

psychology transitions back to risk aversion, Greek

bond yields will climb again, and wave5 down

should ultimately carry the ASE to new bear-market

lows.

THE EURO

The euro represents another wobbly market with

broader implication for stocks as a whole. As the

December 2013 EFF reiterated, “The euro weakens

against the dollar when stocks and social mood wax

negative; the euro strengthens against the dollar when

stocks and social mood wax positive.” Since its July

2012 low, the euro has reflected the region’s swelling

confidence, pushing 16% higher and tracing out a

double zigzag correction. The wave labels (W)-(X)-(Y) on the chart denote the pertinent legs of the rally.

Wave (Y) began in July 2013 and rose in three waves

to an intraday high of 1.3993 on May 8. Wave C of (4)

traced out an ending diagonal to complete the advance.

Last month, prices broke below the diagonal’s lower

boundary, confirming the end of the larger-degree rally.

The decline should be the first of many down waves

that carry the euro lower over the remainder of 2014.

ECONOMY & DEFLATION

If European stocks are indeed correcting at Supercycledegree, as the wave structure suggests, economic

weakness should significantly affect everyday

households and small business owners. Two new

surveys released last month suggest that it’s doing just

that. According to 10,000 business managers surveyed

by credit manager Intrum Justitia, write-offs for bad

debt just hit a startling €360 billion, a 3.1% increase

over last year. Almost three-quarters of respondents,

meanwhile, report no positive change over the past

e60246




9

three months. A study by Fitch ratings, moreover, finds

that impaired loan volumes at European banks spiked

8.1% in 2013 and have finally crossed the € 1 trillion

mark . For nearly a third of the 100 banks surveyed,

volumes of bad loans are up more than 20% over the

previous year.

If you think that investors might have started

positioning themselves defensively in the face of

spiking defaults, think again. As shown below, the

median cost to insure 17 eurozone banks against

default for five years has actually fallen, reaching a

new multiyear low last month. Most people still fail to

grasp the precarious position of banks, because stocks

and social optimism remain elevated. It’s yet one

more vivid expression of confidence that will darken

dramatically during the next bear market.

Despite the evidence presented on the first three

pages, most economists are also unwilling to abandon

the idea of Europe’s imminent recovery. This May 9

CNBC headline typified dozens of others last month:

Great Recession Over as

UK Nears Pre-crisis Peak

This latest pronouncement of victory comes from the

National Institute of Economic and Social Research, aBritish think tank predicting that economic output will

see a new high within the year. Echoing the optimism,

a May 2014 Bloomberg Markets poll finds that 40%

of global investors see the world economy improving

over the coming year, while another 43% say it’s

stable. Just 12% think the economy is deteriorating.

The International Monetary Fund, meanwhile, puts

a mere 25% chance on the prospect of the eurozone

slipping into deflation by 2015.

Illustrating our contrasting view, the chart below

suggests that the 27-nation European Union including

Britain has been sliding toward deflation and

depression ever since stocks peaked at Supercycle

degree peak back in 1999/2000. Indeed, debt ratios and

unemployment (top two lines) continue to skyrocket,

while economic growth (third line) wanes. And asthe bottom line indicates, consumer prices across the

EU remain trapped in a decline that has persisted for

three years and counting. Keep in mind, the 14-year

period depicted on this chart includes governments’

most aggressive attempts in history to thwart natural

economic law. Deflation and depression persist,

because social mood continues to turn negative at

Supercycle degree. It really is that simple.

e60246

567 euro financial forecast june 2014

Documents