14th January - Gilts may go further
18 January 2016
TECHNICALS:
WEEKLY CHART iShares Core Gilt ETF
This is a line chart of the Gilt market over the last ten years.
It is a well-constructed bull trend
Prior Highs are good support, ratcheting the market better.
The latest pull-back tested the support from the Prior High THREE times.
Each time it has bounced.
Now note the possible completion of a bull continuation Head and Shoulders….
DAILY CHART Mar 16 Long gilt future
Note that the market has smashed up through the succession of Prior Highs between 118.92 and 118.53.
A close above the level 118.92 should establish support at those highs and lever the market higher still.
FUNDAMENTALS:
After more than three months of range trading, the Gilt looks set to retest the upside. What has changed?
In a nut-shell the economic environment, both domestic and global, has shifted :
As a result of a solid UK economic expansion, market expectations in 2015 were focused around a first Bank of England rate hike being delivered by mid 2016. But UK Q3 GDP came in a little softer than expected and subsequent data releases have done little to suggest the pace of growth has recovered to levels seen in Q1 and Q2.
In addition, the equity market turmoil over recent weeks derived from the weakness in China’s real economy and their equity market has dimmed the outlook for global growth.
Moreover, the oil price has continued to slump on over-supply. This is because Iran is moving closer to resuming her pre-sanction oil export volumes and Saudi Arabia remains determined to keep production levels unchanged. She is seeking to maintain her oil market dominance. All of which means that the oil glut looks set to continue for a protracted period which will bear down further on inflation.
Finally, the Fed got off the fence and made its first rate hike at the December FOMC meeting. Policy makers deemed the US economic recovery was strong enough to take it, even though economic data makes that decision look somewhat questionable. The recent FOMC minutes have revealed just how close that decision was.
Add all these elements together and we have:
For the UK Gilt these factors are bullish especially when the governments determination to stick to its debt reduction strategy is factored in.
Surely the Bank of England today (14th January) acknowledged much of the above when it announced that it was keeping the Asset Purchase program steady at £375.0B and Bank rate unchanged at 0.50%. In fact, the outlook for UK interest rates is in our judgement unchanged for the whole of 2016.
The one negative that could hit the Gilt is the looming vote on continued UK membership of the EU. But so far the Pound appears to be taking that strain having moved sharply weaker in recent days and weeks.
In summary, the UK looks set to continue enjoy a benign mix of economic fundamentals that include growth of around 2.2%, inflation over the next two years of between 0 - 0.9%, low unemployment with restrained wage growth and a government committed to fixing the public finances, in such an environment why wouldn’t investors want to buy the Gilt?
Consider also, that the Fed may well wait several months before hiking again. Recent ISM surveys were disappointing with the manufacturing version flagging recession, despite a strong non-farm payroll report.
In short, all is far from well in the global economy.
Next story:
22nd January - stocks at the end of the week 
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8th January - Oil is at a crucial level