15th November - Watch the European Bond Markets
19 November 2013
TECHNICALS:
WEEKLY European Bond ETF CHART
The shoes no signs of topping out. Instead it has bounced off the support from the recent high from 2010.
German bund futures (Dec 13) DAILY CHART
The short-term picture of that bounce shows the clear bull trend that resulted since the beginning of September.
Note the recent bounce off the Prior Highs support coincident with the diagonal trend line support at 140. 87.
The trend is well-structured and set to go higher.
FUNDAMENTALS:
As the Euro Zone economy started to show some signs of recovery during the summer, the Bund along with other leading government bond markets began to sell off. The move was taken as the beginning of what was expected to be a long bear market in bonds fuelled by economic recovery in the major economic areas; the US, Euro zone and Japan, leading to renewed interest in stocks, which began to either make new highs or revisit old ones.
However, that sell-off now looks like no more than a correction in what we think is still a bull market. Expectations of recovery in the Euro zone so far have disappointed. And although the German economy continues its modest recovery, she seems to be on her own.
The French economy which in the first half of this year appeared to be emerging from recession, has seen that recovery fizzle out. The release of Q3 GDP data this week has revealed the up hill task that still lies ahead. The French economy shrank in the 3rd quarter and Italy’s economy is still in the depths of recession.
Taken as a whole the Euro zone economy grew by just 0.1% in the 3rd quarter and contracted 0.4% year on year, were it not for German growth the data would have been worse.
So where as a few short months ago expectations of a Euro zone recovery were ridding high, the bitter truth is you need a microscope to see it. True Ireland and Spain are set to emerge from their troika rescues but they will not off set the economic weakness so evident elsewhere such as France, Italy and Greece.
The ECB has tried to add what stimulus it can to the Euro zone economy, by cutting interest rates further at the previous week’s meeting, but the move is unlikely to have too much of an impact; rates have moved from 0.50% down to 0.25%! What else can the ECB do?
Given the European Central Bank has never engaged in QE in the same way as the Federal Reserve, The Bank of England or the Bank of Japan, her options are limited to advancing yet more long term loans to the Banks, due in part to German distrust of printing money.
But the only way to beat what increasingly looks like an impending bout of deflation is to flood the Euro zone economy with a wall of cash via government bond purchases, but that isn’t likely to happen.
The result then is a prolonged period of, at best ,extremely weak growth with inflation falling from what is already a very low 0.7% year on year rate. The ECB has virtually run out of tools since it wont resort to QE.
The only relief the Euro zone economy can then expect is from falling long-term interest rates, meaning the Bund.
We expect to see the Bund rally further in response to persistent economic weakness and creeping deflation coupled with a neutered Central Bank.
The outlook for the Bund then is clear; it remains a bull market. The summer sell-off was a correction from which the market has now almost recovered. The next move is up with successive new highs.
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