23rd February - What is driving the Bund up?
27 February 2017
TECHNICALS:
WEEKLY CHART
The market’s bull trend is well-established.
The latest test of the support for the trend at 161 found it to be very strong.
WEEK CHART
There is a well-formed bull H&S reversal in place that is set to drive the market a good deal higher … up as far as 170.50….
FUNDAMENTALS:
As 2016 drew to a close the bull market in government bonds, including the Bund, was widely considered to be over due to two factors:
By December 2016 the Bund had sold off by nine big figures and traders were anticipating the start of a full-scale bear market. But it never happened. In fact, the Bund steadied and slowly staged a recovery which to date has seen the market recover by around five big figures. What has changed?
The main answer is political risk.
After the UK voted to leave the EU voices in other EU Countries that had been ignored or dubbed extreme began to gain greater attention. In Holland there are calls for a referendum on continued EU member ship, albeit with only limited public support. In France, Presidential elections are due and the Far right candidate Marine Le Penn is mounting a serious challenge to the status quo.
Her policies include withdrawal from the Euro, crackdown on immigration and a potential EU membership referendum. In Germany too, elections are due and Chancellor Merkel is facing a stiff challenge as a result of her open door immigration policy.
For the Bund, the main current dynamic is the uncertainty thrown up by the looming French election. Although Le Penn is forecast to do well in the first round of voting she is expected to lose in the 2nd.
But then no one thought Trump would be US President and few thought the UK would actually vote to leave the EU.
These surprises make forecasting the outcome in the French election less reliable. If Le Penn were to become the next French President and she held an EU referendum on continued membership, resulting in France leaving not just the Euro zone, but the EU, the whole EU project would be dead.
The main reason for the EEC/EU was to bind France and Germany together to stop them serially waging war on each other. It is that fear, however remote that may rationally seem, that has sent the Bund higher as traders seek protection from such an improbable, but paradigm-changing event.
If the EU were to see France leave, the dismantling of the post WW11 world order would be almost complete. The US under Trump is questioning the value of NATO, an alliance that has kept the peace in Europe for 72 years. The UK has decided the EU is hindering it rather than helping it and is leaving to engage with a wider world that has changed massively since it joined in the early 1970’s. If France elects Le Penn the unravelling would be almost complete.
So, although Le Penn is still the outsider in France’s election and will probably not become President, after the events in the UK and US in the last several months, traders are not taking anything for granted. They have sought the relative safety of the Bund.
Next story:
9th March - Gold is looking vulnerable 
Previous story:
16th February - The bulls are still in control of the S&P