Wednesday, 24 February 2010

Poor consumer confidence rattles market

Poor consumer confidence from the US coupled with lower then expected Business Confidence from Germany , lifted bonds across the curve and smashed the Euro in the process.
Bunds are now trading back at the 124 level, where as the Schatz is trading at its all time high, yielding below 1%, which is below the current rate.
Euribor and Short sterling yield curves are flattening further pretty much on a daily basis, as continuing worries over the global economy raises doubts that any tightening will occur any time soon.
Spreads along the curve continue to fall, as there is also chatter that we could actually get a rate cut from the ECB, which seems far fetched but never rule anything out.
The latest data add to the recent run of bad news. With German Ifo business sentiment falling in February and French consumer spending dropping in January, there is little hope that the euro-zone recovery will be renewed this quarter.

In the US the stagnation in core consumer prices over the past few months demonstrates that it is too soon to dismiss the threat of deflation. With the unemployment rate still close to 10% there is an awful lot of spare capacity and unit labour costs are in freefall. Money and credit have started to contract. All the evidence therefore points to a further decline in the annual rate of core inflation, probably to below 1% by the end of this year. Under those circumstances, it would be very surprised to see the Fed start to tighten monetary policy.

Monday, 22 February 2010

Stock rise despite discount rate hike

Last week equities performed strongly shrugging off the discount rate hike by the Fed. The S&P 500 future climbed as high as 1111.00 before closing at 1106.25 on Friday. This week may prove slightly trickier for bulls as China re-enters the fold after a weeklong national holiday and some important consumer based data is released in the US.

From a technical perspective the S&P 500 future looks in much better shape that it did a week ago. On both Thursday and Friday last week the market closed above the technically significant level at 1103.25 pushing the chances of a further break higher this week. Further resistance lies to the upside around 1113.00 and beyond that at 1127.00, a breach of here would signal the market is ready to retest the 2010 highs at 1148.00. If the market was to fail around its current level and break back below 1103.25 it would be in danger of falling back down to the previously held daily uptrend at 1068.50. If the market was to break this uptrend a break of 2010 lows would almost certainly follow making a serious move lower likely.

Last week the markets overcame a large test when the Fed raised the discount rate and the markets continued to rally after some initial jitters. This has to be taken as a bullish sign although it would be easy to read a little too much into the market’s reaction. We believe the true test will come when the Fed changes its language in particular the removal of the phrase, “rates will remain exceptionally low for an extended period”. Until then the markets, particularly the equities, will trade safe in the knowledge of loose monetary conditions.

It is worth noting that last week’s equity rally was on the back of relatively light volume and several analysts have pointed to the European and US Indices Options expiry on Friday as a possible cause for the bullishness. We believe this may have been a contributing factor and that this week’s trade will tell us to what extent but with Consumer Confidence, GDP and Durable Goods orders all out this week we could see a real test of the current rally.

Thursday, 18 February 2010

Jobless claims rise along with Producer prices

Stock markets have taken a hit as I speak with a 35K jump in jobless claims over in the united states along with a 1.4% rise in m/m Producer prices. Despite the inflationary data bunds have jumped 13 ticks to trade at a high of 123.42 as there seems to be no sign of a sustained recovery in the job market.
Looking forward much of depends on the ongoing uncertainty in the Euro-Zone regarding the “PIGS” (Portugal, Ireland, Greece and Spain). With peripheral spreads remaining at record wide levels for the history of the Euro-Zone, it seems that the issues are far from resolved. It seems only a matter of time when the markets begin to attack the other Euro-Zone peripherals, and should this happen Bunds are looking to trade well above 124s.
Looking at the short end we continue you to see flattening along the curve as red month Euribor continue there march upwards, as there seems to be no signs of any tightening in monetary policy given the current situation.
Looking at tomorrow we have retail sales out of the UK and CPI out of the states. It will be interesting to see if the rise in prices to the producer has been passed on to the consumer.

Thursday, 11 February 2010

Greece Bailout?

Well its been a wild few days for bonds, stocks and currencies alike as the mixed messages on the bailout of Greece filters through to the market. The Eurodollar has had 200 point swing, where as the Bund fell 90 points on the first announcement of a possible Bailout before bouncing on denials.
The fact the EU has pledged its support to Greece, has given the market slightly more confidence, and this has resulted in a surge in front month STIRs, especially the Euribor, as we have rallied 10 full ticks in Jun10 and Sep10 Euribors, steepening the yield curve.
Greek bonds rose for a third day as European Union leaders demanded the nation’s government get its budget deficit under control, while stopping short of offering specific measures to help manage the country’s debt.
This is after a statement from Merkel and Sarkozy which echoed prior calls for Greece to clean up its accounts and gave the International Monetary Fund a monitoring role. French President Nicholas Sarkozy and German Chancellor Angela Merkel told reporters the statement is aiming to convince investors that Greece has the support of all stakeholders in its efforts to reduce its budget deficit.
Looking ahead, we are likely to get more details from the summit to keep our hands full, as well as Retail sales release from the US which will give us and Idea of how the consumer is holding up.
Have a good weekend!

Tuesday, 9 February 2010

Red and Green month STIRS trade higher

Its been a quite a bit of a rollarcoaster the last few days, as worries intensifying over the PIGS nations (Portugal, Ireland, Greece, Spain), has lead to massive rally in long end Euribors particularly, and a sell of in the front months as LIBOR rates rise. The front end of the the curve has been flattened quite aggressively as we see the costs of insuring debt from these nations increase pretty much on a daily basis.
Its typical of the market to react in this way given that this news has actually been out there since December, and this move really came out of nowhere.
We are trading at all time highs in the Shatz, as we are yielding near 1%. It is tough to see yield falling much below that, and it is for this reason I see we have huge downside potential in the schatz.
As far as stocks go, from a technical perspective the S&P 500 future may have done itself some small favours last week. Although we are now definitely in a short term downtrend a strong rally going into the close on Friday produced a daily hammer candlestick and prevented too much ground being lost over the week. Friday’s low of 1040.75 will prove a crucial support level going into next week; a breach would most likely see a brisk move down to 1026.00 with further support around 1015.00. To the upside 1067.00 will be the bulls’ first target as a break of here would place the S&P back into the previous two weeks trading range. Before getting too excited about the recent down move it must be remembered as part of any recovery there will be pullbacks and that we are still above the 200 day moving average, from a technical viewpoint it is too early to be thinking of a double dip.
A large concern for those hoping that the current equity weakness is merely a pullback, is the current strength in the Bund and US Ten Year. It is often said that the fixed income markets are the leaders of new trends. With that in mind it should therefore be considered significant that the Bund is priced at its highest levels since April 2009, and the US Ten Year continues to show strength disproportionate to the prevailing equity weakness. If government bond markets continue to trend upwards we believe further equity weakness is around the corner.
It is rare that equity markets simply fall off a cliff with no form of squeeze or retracement. It is usual to see an aggressive squeeze on shorts that come late to the party as bulls perceive lower prices as a good opportunity to buy. We therefore believe that equities will witness an aggressive pullback over the next 10 days which will provide a good selling opportunity.

Tuesday, 2 February 2010

All eyes on central banks

Over the last five days we have seen government bonds trade sideways, both the US Ten Year and the Bund made yearly highs but these prices were quickly rejected. This week promises to be busy with rate decisions out of the ECB and BOE as well as the latest jobs report from the US on Friday.

The Bund and US Ten Year appear to be entering a consolidation phase after a strong rally, this being said this is more likely to be a pause for thought rather than a medium term turning point. The Bund should look to hold above 122.55 if its upward momentum is to be maintained, a break back below the 50% retracement at 122.27 would demonstrate the bulls have lost the war and a break of 2009 lows may be possible. A very similar picture can be seen in the US Ten Year which has stalled at its contract gap close. Its pivotal support lies at 116.30 with the 50% level at 116.210.
This week we will see the ECB rate decision announced followed by President Trichet’s press conference. This month there will be a shift in traders focus away from hints towards monetary tightening and towards ECB’s stance on the Greece situation and the risk it poses. It is likely that Trichet will avoid shocking the market but any talk of problems spreading into peripheral countries will provide volatility and most likely a bid in the Bund.
The BOE also announce rates this week but with no change expected all the focus will be on the QE programme. The current discussion following a relatively weak recent GDP number is whether we will see an extension to the current £200 billion programme. At the moment this appears unlikely but we do expect the MPC to leave the door open for a future expansion. A failure to do so would most likely catch the Gilt off guard and result in some short term selling pressure.
Important events this week.
• Tuesday: Pending Home Sales US
• Wednesday: ADP Employment Change, ISM Non-Manufacturing US
• Thursday: BOE, ECB Rate Announcements
• Friday: Non-farm Payrolls US

(extracts taken from futex news)

Monday, 1 February 2010

Bond yields remain low

Short term interest rate products continue to edge higher for the start of the year as rate hike expectations for the first half of the year are diminishing. Dec10 Euribor has risen 37 Basis points as a weak job market and on going concerns in debt levels in Greece and Portugal reminds us that we are not quite out of this mess yet.
Fron end spreads continue to decline as it is expected that Mar10-Jun10 Euribor, Eurodollar and Short Sterling spreads will go to zero.
Last weeks fed statement maintained its stance on exceptionally low rates for an extended period of time, but there was opposition to this from one member who believed that the "extended" should be removed from the statement, which shows that opinions are changing regarding the necessity to keep rates this low.
Looking at the long end, bunds have been range bound over the past couple of weeks, between 122.75 and 123.60. With the ECB and Bank of England set to announce rates this week we will be looking for clues on when policy makers will start the rate hiking cycle.
We also have US Non farm pay rolls on Friday, which is expected to show some job creation. A good number would put some pressure on bonds as we are at very elevated levels at the moment.

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