21st November - The continuing bull trend of the Bund
24 November 2014
TECHNICALS:
Monthly continuation chart
The Bund market has broken out of the sideways consolidation from the beginning of 2002.
That 146.90 level is tremendous support.
Daily chart
The market is ratcheting itself better in the short-term supported by the Prior High 149.91 and the diagonal from June.
FUNDAMENTALS:
The Euro zone recently released Q3 GDP reports and the big surprise was that Germany narrowly missed relapsing into recession and France managed a slightly stronger performance than expected.
But in the big picture, growth in the Euro zone’s two biggest economies isn’t strong enough: the 3rd largest economy, Italy, remains in recession and the rest aren’t enough to act as a counter weight even if they were all experiencing trend growth, which they are not.
Add to this the outlook for inflation which remains very low and still risks sliding into deflation. All this in spite of the ECB doing what it feels able to do without incurring the ire of the Bundesbank that remains implacably opposed to Quantative easing.
Today, the Euro zone PMI composite survey was released and it was weaker than expected, meaning activity is set to weaken yet again. No wonder then that the Bund remains Bullish. But is this the top or can it rally further?
We suggest taking a look at Japan over the last 24 years. The economy has struggled with deflation and recession throughout that period. Yes, there have been periods of growth, but it has never been strong enough to be self-sustaining, reliant as it is on easy monetary policies and endless government stimuli.
As a result, the JGB has been a long bull market. Many have tried to call the top, only to get blown away by the next leg of the bull trend.
Unless the Euro zone can reform and drag its self out of its current malaise it seems reasonable to anticipate a similar fate in the Euro zone.
France, Italy and others are unable to contemplate policies that would help re-invigorate their state reliant economies. Germany too, needs to reform if it is to be considered a true Euro zone player; it is all too convenient for the German export-led economy to prosper because of the relative softness of the Euro coupled with very low interest rates, as a result of the un-competitiveness of the economies of countries such as Italy, Greece, France, Spain etc., that rely on over-bloated state sectors.
Were Germany still using the D mark the story might be different, since surely it would be very much stronger than the Euro.
In short, the Euro zone looks trapped in a period of economic underperformance with a Central Bank that has consistently failed to get ahead of events, always doing too little too late.
With interest rates already next to zero there is very little left to be done with short-dated interest rates, the only relief left available is from longer-dated interest rates: the Bund.
And if the ECB were to eventually get serious and adopt QE in the same way as the Fed and Bank of England have done, it would offer the Bund very good additional support. On the other hand, if the ECB carries on as now, the Bund can only rally on the endless economic weakness.
In summary, which ever way you look at it, the Bund remains a buy.
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28th Nov - EUR/CHF Back to Old 1.2000 Floor 
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23rd - EUR/GBP – Long Term 61.8% Support Under Pressure