10th January - The Bunds look vulnerable
14 January 2013
TECHNICALS:
WEEKLY CHART
The market has been moving sideways for most of 2012.
Three failures at the 146 level are in place.
But the medium-term test of the bull market is really the support from the Prior Highs at 140.23,
The market has bounced off that level twice…maybe three times.
And until that breaks the bears must remain very short-term.
DAILY CHART
In the short term however, there is a bear H&S Top in place, whose completion coincided with the break of Prior High support at 143.43.
Note the rally back after the initial sell off.
Note too that the minimum target of the H&S pattern is 141.50 or so for short-term bears.
Medium –term bears need to wait for a break of 140.23.
FUNDAMENTALS:
The long crisis-driven bull market in Bunds is increasingly looking spent. Over recent months the Bund has traded sedately away from the highs as traders have increasingly become immune to the woes of the Euro zone. It hasn’t got much better, but equally, it hasn’t deteriorated for a while.
Additionally, the much-debated and feared US fiscal cliff was avoided in an eleventh-hour deal. Traders and investors were rightly concerned that if policy makers failed to reach a deal to avoid going over the cliff, the US economy would have been plunged into recession and taken the global economy with it.
The last-minute deal agreed between Congress and President Obama averted such a calamity. So although the Euro zone economy remains in recession, traders have turned optimistic about the fortunes of the global economy.
With the focus of attention now away from the US fiscal cliff, traders have noticed that US economic data has continued to improve. The Q3 GDP report was revised up in December. The most recent ISM surveys were stronger than expected and non-farm payroll continue to report a steady stream of new jobs.
In China, data too has improved with manufacturing activity strengthening and offering hope that the world’s two biggest national economies can together drag the global economy out of the malaise that has engulfed it in recent years.
Even in Japan optimism is fuelled by the election of a new government whose Prime Minister has pledged to do much more than his predecessor to drag the economy back to health and out of a seemingly intractable deflation.
What has impressed Japan investors about the new PM is his threat to shake up the Bank of Japan by mandating them to meet a new inflation target of 2.0% and he has threatened legislation to enforce it. Clearly with inflation so long absent from Japan’s economy a great deal of quantative easing will be required to boost inflation from around -0.4% to the new 2.0% target.
The impact of all of these developments has been clear on markets. Equity markets globally have found a new bullishness and made highs not seen for five years, the impact on bonds has been the opposite: the bears are creeping in.
We judge that the Bund in particular is showing all the early signs of a serious reversal. With the Euro zone crisis no longer deepening and traders becoming numb to what they already know, meaning risk aversion no longer dogs markets, traders are looking to take on risk.
If the US economy can keep growing and US politicians find enough common ground to deal with the debt ceiling and budget deficit, if China can keep her economy going and Japan can at last shake off the deflation fuelled malaise that has held her economy back for so long, the Eurozone might just get the boost it needs to see its own economic recovery take hold.
With so much monetary stimulus awash in the major economies, when self-sustaining growth does emerge, fears of a spike in inflation will see investors rush to dump bonds, including the Bund. We might still be some little way off from that scenario but as growth does picks up, that fear will grow and the Bund will has no where to go but down.
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