Tuesday, 7 September 2010

10 year Bunds under pressure

Over the last five days both Bunds and US Ten Years have come under pressure on the back of a rebound in equities. The catalyst for this move was some surprisingly strong data out of the manufacturing sector followed by a good payrolls number. This week there is little to get excited about except the latest rate decision from the BOE.
From a technical perspective the Bund shorter term outlook has become more balanced following the aggressive sell-off last week. The Sept. contract reached lows of 131.73 before achieving a slight rebound yesterday. This low perfectly matches the target of the small daily double top formation formed the previous week an indication that the concerted selling could be over for the time being. It is also worth noting that from today volume has switched to the Dec. contract providing a large contract gap. In recent times we have seen these closed within the first few weeks of the new contract, if this is to be achieved again the target price is 131.73 (Dec.).

Last week the macro releases proved culminating in some strong jobs data out of the US on Friday. The US payrolls numbers showed that only 54K jobs were lost compared to expectations of -90K. The Private Payrolls number also surprised to the upside coming in at 67K against expectations of a 40K print. Although these number were not exceptional Bunds and US Ten Years found themselves under pressure. We doubt that these recent strong figure will spell an end to a deterioration jobs market in the US and we expect further weakness to occur throughout the rest of 2010.

This morning the WSJ printed an article which stated that recent disclosures by European banks showed they did not provide a comprehensive disclosure of government debt holdings during the European stress tests. This revelation resulted in a strong rally in the Bund as spreads against European peripherals widened. This story will likely develop during the week and gather further interest.

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