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8/10/2019 567 Euro Financial Forecast June 2014
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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:
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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.
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The European Elliott Wave Financial Forecast — June 6, 2014
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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
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The European Elliott Wave Financial Forecast — June 6, 2014
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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.
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The European Elliott Wave Financial Forecast — June 6, 2014
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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
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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
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The European Elliott Wave Financial Forecast — June 6, 2014
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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....”
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The European Elliott Wave Financial Forecast — June 6, 2014
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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
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The European Elliott Wave Financial Forecast — June 6, 2014
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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.
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