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26th March 2018 - Has the Bund turned bullish?

26 March 2018





The bears were exultant when the horizontal supports from the Prior High at 160.69 were breached on the 3rd attempt..

And when the market pushed beneath the Prior Low – especially 158.73 that established overhead resistance.

The market will surely struggle to rally back through 160  - where it failed recently…


 But though the bears feel relaxed, the market still has considerable freedom of action to trade higher  - say to 160 – without smashing important medium and long-term resistance.

The short-term chart shows the rally from the recent low is well-advanced and shows no sign of stopping in the short-term.

From the short-term chart only a break of 161 would destroy the bears’ case.


The ECB, at it’s last meeting, dropped a key phrase from it’s policy statement committing policy makers to extend their QE Bond buying if the Euro zone economy showed signs of cooling. That was because they judged the economic recovery had become sufficiently broad-based that the risk of relapse had virtually evaporated.

Indeed, over several months and quarters data has more than supported their recent decision. But since making a low in early February, the bund has not only rejected the lows, but begun what increasingly looks like a fresh leg of the long bull market!


There is an argument to be made that some of the buying is due to safe-haven buying, induced by the sell-off in stocks that occurred after new Fed Chair Powell delivered his first testimony in Congress. That testimony was broadly construed as more hawkish than his predecessors stance, but we think there were other reasons for his hawkishness.

About two weeks ago US President Trump lived up to his campaign rhetoric of America First by announcing trade tariffs on steel and aluminium imports as he judged they were unfairly destroying US jobs. Additionally, he alluded to imposing tariffs on car imports, saying that a trade war would be good and winnable.

Clearly this set off alarm bells in global markets and equities retreated further as investors/traders held their breath anxious that a trade war may indeed be about to break out.

This week the outlook worsened as Trump slapped 25% tariffs on US$60Bn worth of Chinese imports, claiming unfair competition and threats to national security.

In response, China has tried to show a degree of restraint, but announced tariffs of her own on US$3Bn of imports from the US. But where do we go from here? And why, you might ask, is the bund the only major bond market that seems to have acted so bullishly?

First, this looks like the beginning of a period when globalisation is rolled back. The US President fails to see the benefits to consumers that globalisation has brought and focusses on the downside which is the loss of jobs in certain uncompetitive sectors. This despite the fact that the US economy has been creating many new jobs over a period of years leading the Fed to fret that at almost full employment inflation is becoming a risk.

For the bund, the Euro zone/Germany is the world’s largest exporter running huge trade and Current account surpluses. If a trade war breaks out the Euro zone economy and German economy will be hit. The ECB would be forced to roll back on its limited attempts to move away from its emergency lax monetary policy and may indeed be forced to increase its QE program.

The sell-off seen to date in equity markets is therefore only a taste of what could happen if a trade war breaks out and investors are clearly already getting nervous, indeed the DJEUROSTOXX50 was already moving lower when the US S&P was still making new highs.

In any event, history tells us that trade wars ultimately benefit no one and often lead to conflict. The recent period of globalisation had two beneficial affects:

A positive impact on world trade and growth,
By interlinking the world’s economies made military conflict less likely.

Where then, given the current trade war threat, does the bund go from here? We believe higher.



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