20th August - UK Gilts, more upside to enjoy
24 August 2015
TECHNICALS:
UK Gilts weekly chart
The bounce off TWO SUPPORTS; FIRST, the Prior High support at 114.78 and SIMULTANEOUSLY, the diagonal from Dec 2013 , has laid the foundations for the creation of a bull flag.
That flag is close to completion
A weekly close above 118.41 (currently 118.66
UK Gilt Sep 15 daily chart
Note the completion of a multiple bottom with the likely close above 118.15 Prior High today…
Projecting the depth of the bottom suggests a move as far at 122 or so.
FUNDAMENTALS:
The spring and summer sell-off driven by expectations of a US and later, a UK rate-hike has come to an end. The Gilt now looks set to retest the earlier higher levels.
Why?
Although the Federal Reserve and Bank of England are still talking up the need to begin to gradually tighten policy, events have taken a turn that questions that stance.
The Greek crisis may now be more or less resolved, removing what could have turned into a wider political and economic crisis of unknown proportions, but what of China?
The Chinese economy has declined to a slower pace of growth and the stock market has lost around 30% of its value, prompting the Chinese authorities to spring a surprise currency devaluation.
Add in the continuing sell-off in oil and all in the global economy clearly isn’t well!
The result of this uncertainty is that equity markets globally have been in retreat, and look vulnerable to further selling.
In the UK, economic growth continues at a solid pace. It is supported by consumer demand and a still-hot housing market. But inflation at 0.1% year-on-year, as measured by CPI, is almost non-existent. And when the latest sell-off in the oil price feeds through, UK inflation is almost certain to turn negative.
For bonds, including the Gilt, the current environment is far from bearish. In fact it is bullish. If the Bank of England decides to hike rates early in 2016, with inflation remains around the current low levels and the Chinese slowdown worsens, and if stocks suffer a more serious correction, then the Gilt will rally as longer-term interest rates will reflect the risks facing the UK economy.
Why, one might ask, is the Bank of England and the US Federal reserve even contemplating higher interest rates? In the US, the Fed describes growth as moderate and inflation as subdued.
Clearly both Central Banks are concerned that policy cannot remain at current extremely loose settings indefinitely. Both have massively expanded their balance sheets as a result of their QE policies. Since adjusting interest rates is easier that unloading massive holdings of debt, they judge it better to start a long slow process now than wait until economic conditions might demand more punitive action.
But!
If the global economic outlook is becoming more fragile might that thinking be out of step with current economic reality?
The oil price isn’t selling off for nothing. The slowdown in countries like China and the over-supply of the oil market points to slowing economic activity.
If the Fed and Bank of England do raise rates, in September for the Fed and in Q1 2016 for the Bank of England, both may soon regret the move.
In summary, the current economic environment is far from settled. Stocks are reflecting this. We judge the Gilt can rally further and current Bank of England talk of higher rates with inflation likely to fall further may only drive the Gilt higher.
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1st September - Beware the bounce in Stocks 
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13th August - Gold: The bears are in charge