23rd August -Treasuries edged better by Fed
28 August 2012
TECHNICALS:
WEEKLY CHART
The market’s pull back has yet to penetrate the horizontal support from the Prior Highs at 131-20.5 and 131-30.
Without a break of those horizontals the bears will lack enthusiasm.
DAILY CHART
The bounce in the treasuries has reached the 50% Fibonacci resistance which is also horizontal resistance from a Prior Low.
This is an important level. A break of it will re-establish the bulls as being in the driving seat.
A failure will return attention to the testing of support on the downside.
Wait and see.
FUNDAMENTALS:
Since July 25th the US 10 Year Note, along with other leading government bond markets, has been in retreat. And although the Euro zone Sovereign debt crisis raged on, which has been the primary driving force behind the crisis-driven bull market in government bonds, sentiment had clearly shifted.
No longer were traders seeing the crisis as the harbinger of financial/economic collapse with the authorities impotent to act, and although the politicians were still struggling for a definitive cure to the crisis, the spotlight had re-focused onto the leading Central Banks.
Traders were now expecting a coordinated stimulus to be delivered by the Central Banks, as a result bonds retraced and equity markets have rallied, in the US stocks have hit four year highs.
But some, including us, had grown sceptical that the Federal Reserve would join any such stimulus. The non-farm payroll report released at the start of this month was better than expected and last week a much stronger-than-expected retail sales report was released.
Following the Fed’s last policy statement and Bernanke’s recent testimony in congress it seemed reasonable to deduce the Fed was in no hurry to act. In fact, the collective view among policy makers was that the economy was experiencing no more than a soft patch not dissimilar to that experienced over recent years.
Additionally, expectations were high that Greece would be given more time to reduce her debt, allowing growth a chance.
But the FOMC minutes released yesterday evening were dovish to say the least, and equity traders heard what they were hoping for; the Fed was still set to ease. The minutes revealed that the Fed saw strong grounds for more easing and soon, unless data shows substantial and sustained improvement.
Has recent data met that test?
The discussion showed that policy makers considered several options: an open ended bond buying program, or a program that was very flexible. They also discussed starting a program similar to one just begun by the Bank of England where credit is offered direct rather than through the Banks.
In any event the minutes represented a stark change of tone from the Fed and makes coordinated stimulus seem more likely, especially as the German and French leaders today refused to offer Greece the leeway she sought.
What then of the markets reaction? Equity markets have eased lower. Are traders now fearful that the Fed knows something they don’t ? And the situation is worse than expected? If so, rather than rallying on the easing news, traders are seeking a cloud to the silver lining.
At the same time the month-long retreat in Treasuries has stalled - with a correction setting in, but how strong is the correction. Moreover will Treasuries and bonds generally simply resume the crisis-driven bull market?
Although the Fed looks set to ease at their September meeting, data over the coming weeks will set the tone in bonds. Is the Fed acting because it fears a worsening of the economy, or is it acting to give growth a kick? The answer to this question will decide the outlook for US Treasuries and Government bonds generally.
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23rd Aug - Will USD/ZAR Momentum Fade?