2nd June - Watch the Bund
02 June 2014
TECHNICALS:
Weekly chart
This is a thrilling chart – the Bund is breaking up through the High of the range that has been in place for two years….
Daily June 2014 chart
Here is the detail.
Note the cautious first approach to the Prior High.
And then the failure to sell off.
The resurgence of the last week is unmistakable.
Only a break back through 145.67 would threaten the bulls’ confidence.
FUNDAMENTALS:
In an environment where equity markets are either fast-approaching old all time highs or are making new ones, conventional wisdom would dictate sell bonds. But, currently, that would be the wrong trade.
Why when equity markets are so bullish is the Bund also a clear Bull market?
Take a look around the major economies and the answer begins to become clear. In the US the US economy has just registered a Q1 GDP annualised contraction. Most analysts including the Fed are reasonably relaxed about it because they blame the very long spell of extreme winter weather that gripped almost all of the US.
The argument goes that as the weather has improved so too will the economy and a strong Q2 GDP report is anticipated.
However the Fed isn’t so sure that it is prepared to even consider tightening policy yet. True, they are still rolling out the taper policy, but that is a scaling back of new stimulus, not a reduction of existing support. Only in recent FOMC minutes did the Fed reconfirm that interest rates are set to remain low for an extended period. That supports the US equity market together with the expectation of faster growth.
In the UK the economic recovery is hot; so, too, is the housing market. Yet the Bank of England policy makers are only just starting to talk of the need to consider tightening policy.
What then of the Euro zone?.
Here the economic landscape is entirely different.
After the long struggle through the sovereign debt crisis, the Euro zone economic recovery remains feeble. Remove German growth and the “rump” Euro zone economy looks even weaker, moreover inflation is very low given rise to concerns about deflation.
The ECB has let it be known it is preparing a package of measures designed to head off deflation and boost growth and a rate cut is apparently part of the plan. But with interest rates currently at 0.25% something more comprehensive is needed; a QE program and that will see long term yields fall further meaning the Bund is still a bull market.
So, due to the current influence of the leading Central Banks, both equity markets and some bond markets are able to rally together.
What are the risks to the Bund?
Currently we can’t see any that are economic.
And even allowing for the protest vote in the recent EU elections, where fringe parties have increased their presence due to voter dissatisfaction with high unemployment, slow growth etc., that is hardly a threat to the ECB’s current policy stance; they recognise the need to address all of these.
In summary we judge the mature rally in Bunds hasn’t yet fully matured and so long as growth remains weak, inflation threatens to turn to deflation requiring continued Central Bank stimulus the Bund will extend its run. Just look at the price action in the JGB over the last twenty years or so.
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04th Jun - US Dollar Index Attempts Recovery 
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29th May - Cotton Bulls Sidelined After Slide