10th May 2011
Bond Overview

Bond markets have been steadily moving higher over the last week, with last week’s ECB meeting and the continued issues regarding Greece being the catalyst for the recent break out higher in Bunds. German Bunds are now closing in on the 3.00% yield level.

Thoughts from the Trading Floor

From a technical perspective, German Bunds have potentially staged a key weekly reversal. The market has recovered from firm support at 3.5%, which coincided with the 119.85-95 area, and is now closing in on the 3.00% yield level. This would coincide with around the 124.60 level on the futures. If this level gives, the market may confirm that it has turned on the weekly timeframe and signal substantial gains over the coming weeks. The move through daily resistance, now support at 123.00 should continue to provide a firm base for further short term gains. Bulls will need to protect this level should the market have a deep pullback of this week’s gains. With the 3.00% yield level being such a key weekly pivot, we would expect choppy trade around here before we reach a conclusion of which side of the market is in control.

The Bund market’s strength over recent 2-3 weeks can be put down to the tensions in the Eurozone debt crises. We have seen a fresh deterioration in yields across the board almost on a daily basis, with peripheral yield spreads vs. German bunds broadly trading around Euro lifetime highs. The end of last week saw Bunds climb on the back of reports that the Greeks were seeking to leave the Eurozone raising the prospect of a restructuring of their debt. Although this has been denied by EU officials and publically by the Greeks, there is no smoke without fire. There now seems to be a move towards the inevitable conclusion that there will be a restructuring event of some sort in the coming months. However, it is likely that the EU will attempt to put across a package of increasing financial aid for Greece, either in terms of increasing the loans to Greece and/or easing the terms of the loans. This package may delay the restructuring to a few months down the line, although it seems that the complete lack of confidence in Greek debt has reached the tipping point where restructuring is inevitable. As per usual the last 2-3 days has seen reports f restructuring, aid packages, etc. with the usual denials and other conflicting messages released to the press. We have consistently seen this to be the case over the entire duration of the Eurozone debt crises. Invariably, in the long run, this too leads to a loss in confidence in the deeply flawed political system of Europe.

Bull View

Bulls will need to protect the 123.00 level if they are to build a base for further short-term bullish action. The market has now built value just below here, and thus any deterioration to back below here may be significantly worrying for bulls.

Bear View

Bears will need to protect the 124.60 level. If this is achieved they will need a swift move to back below the 123.00 level in order to signal that the recent move higher was short-term corrective action.

Futex View

We are bearish the German Bund in the medium- long term. The market has settled into a steady rhythm of weekly lower highs and lower lows since making the August 2010 highs. However, the ongoing issues in the Eurozone leave us to believe that a good short-term run higher is likely. If the bunds breach the 3.00% yield level or if the Eurozone debt issues deteriorate further we should see the medium term outlook adjust accordingly.

15th February 2011
Bond Overview

Bonds tracked sideways last week in a rather lacklustre fashion. The market was largely trapped between 123.29 and 122.30. Volume was below average, but with a busy economic calendar this week, volatility is likely to pick up.

Thoughts from the Trading Floor

From a technical perspective, German Bunds have consolidated within a tight range over the past few trading days. Downward momentum has ground to a halt, yet upside pressure has failed to break 123.17. Bulls seem eager to re-enter the market but have bided their time; first signs of an upward drive will come from a breach of 123.17. If such a scenario plays out, upside targets for this week can be found at 123.76, 124.36 and 125.05. It is important to remember that the trend is still pointing to lower ground and a downside break is still on the cards with the 3.5% Bund yield still a target in many traders’ minds.

There is a raft of economic data out this week and traders will be focusing on a variety of numbers and themes. UK CPI will be closely watched as there is much speculation of higher numbers adding to the insecurity of the UK’s stance on tackling its ever-growing inflation problem. FOMC minutes will also be released this week. Even though they are expected to be a non-event, traders will be on the trigger if there is a change in rhetoric and a hint of sooner-than-expected inflation or changes to QE2.

EU peripheral debt yields took a sudden rally again last week, with Portuguese yields rallying to all time highs of over 7.55%. It is highly likely that that the EU debt crisis will create more instability in bond markets. Any talk of a Portuguese bailout seems to be already priced into the system; it appears to be only a matter of when, not if. But traders will be watching Spanish yields - currently 5.46% in the 10 year - to see if Spain will be caught in the contagion net. This would leave the ECB in dire straits, as there would be an immediate need to increase the bailout pot.

Important events this week
• Tuesday: CPI (UK), ZEW Survey (Ger), Advance Retail Sales (US)
• Wednesday: FOMC Minutes
• Thursday: CPI (US), Phili Fed
• Friday: Retail Sales (UK)

Bull View

Bulls have not been victorious in winning back any ground but have consolidated the market into a tight range. Buyers will be hoping for a long overdue retracement, back above 125.00.

Bear View

Bears have slowed their advance and have almost come to a stop. Even though they have not given up any ground of yet, they will need to put in a big effort to reach the 3.5% yield over the next week.

Futex View

We are still bearish on the bond market with yields continuing to rise across bonds. However, we will be very wary this week of EU peripheral debt instability and a possible flight back into the safety of German Bunds.

Overview

This week’s Weekly Strategy Session reviewed the reaction of the equity and bond markets to last week’s Portuguese and Spanish debt auctions and considered the market sentiment going into the third week of 2011.  High on this week’s agenda for our traders is the release of further important fourth quarter earnings in the US and key German sentiment data.  Also, our traders are still very aware of the state of affairs in the Eurozone and will be keenly watching the Spanish auctions to gauge sentiment and seek out trading opportunities.  Our leading indicator throughout the European debt crisis has been the peripheral sovereign yields.  We will continue to monitor these closely to help us pre-empt impending market instability and the volatility we thrive on.

Thoughts from the Traders

Last week witnessed market uncertainty on Monday morning with high peripheral European yields and question marks hanging over the future of the Eurozone.  This state of affairs was ahead of Wednesday’s Portuguese debt auction and Thursday’s Spanish debt auction.  Monday evening brought back a level of certainty to the markets when Japan announced that it planned to buy into the European Financial Stability Facility (EFSF), injecting much needed confidence back into Europe. This was the first of a chain of positive events for the Eurozone which included successful bond auctions in Portugal on Wednesday and Spain on Thursday, demonstrating that investor confidence had returned to the Eurozone and market stability was renewed.  A key beneficiary was the Euro currency which strengthened against its major partners, as well as Portuguese and Spanish yields which dropped and stabilised.

This renewed stability painted a calm backdrop for the ECB Interest Rate announcement on Thursday which saw rates being left unchanged at 1%, as widely expected.  However, it was Jean Claude Trichet’s press conference which turned out to be the key market driver as he commented upon Eurozone inflation increasing from 1.9% to 2.2% and the ECB’s bond buying programme.  Trichet’s hawkish tone, highlighted by his use of the key phrase “monitor closely” when referring to the current level of inflation in Europe, caused a general sell-off in core European bond markets.  New traders must familiarise themselves with such key phrases and words.  Their use by the ECB in the pre-prepared statement, or during the press conference, has historically highlighted to the markets an important shift in policy thinking/strategy.  Such preparation is key to trading successfully as it allows you to rely upon your trading instincts safe in the knowledge that they are built upon a sound foundation.  The mental clarity that this affords will make executing effective trading decisions much easier giving you the ability to recognise market trends and patterns swiftly, providing you with money making opportunities.

Going into this week we currently see stability concerning the state of the Eurozone as a whole.  However, following Thursday’s ECB press conference we know that any hawkish or dovish comments/news concerning Eurozone inflation and/or interest rates has the potential to unsettle the markets.  With this in mind, our traders will be paying special attention to ECB speakers - both scheduled and unscheduled.  It is your responsibility to research which ECB members are hawkish/dovish in order to provide you with an advantage upon the release of any relevant comments.

 Aside from the Eurozone debt crisis and ECB comments, a key driver of the markets this week will be fourth quarter earnings.  Traders should pay close attention to price patterns upon the release of earnings from sector leaders or other important companies, as these patterns often repeat in the markets on the back of subsequent earnings releases.  A profitable trade historically for our traders has been to fade aggressively the release of Goldman Sachs’ earnings.  This pattern and trade concept is very difficult to execute accurately whist containing your risk but will be something we will be paying close attention to this week.  Such trade ideas do not always endure over the quarters so you have to be quick to spot them and fearless in your execution of them.  The markets’ reaction will also give you an indication of overall market sentiment.

On the third Friday of every month we see final positioning before the expiration of standardised options contracts.  It is important that traders are aware of such events as they can produce volatility and thus tradable, short-term price movements.  Good traders will again identify repeated patterns in the markets around these specific events and develop money making opportunities as a result.

Summary

This week witnesses plenty of fundamental market drivers which should provide daily opportunities in the markets.  Bond traders will be very conscious of ZEW and IFO from Germany, whilst equity traders will be looking extremely closely at fourth quarter earnings and the markets’ behaviour in advance of options expiration. The Eurozone crisis has once more faded slightly to the back of our minds, but with the Portuguese yields now settled around the 6.8% level, it would not take much for them to breach the key 7% level once again and for the crisis to return to the forefront of our trading.

18^th January 2011

Bond Overview

Bonds dropped last week as the ECB shocked the market by raising concerns over short-term inflation caused by rising commodity prices. Their remarks led to fresh selling across the yield curve due to the outside chance of an earlier than expected ECB rate hike. Bunds shifted down last week breaking the 125 handle and touching 124.27 before stabilising.

Thoughts from the Trading Floor

From a technical perspective, German Bunds saw bears take control and overpower weak buying pressure, snapping through support at 125.05 before eventually bouncing off 124.36. Bears will be waiting for a renewed assault on the 124.36 and will look to test 123.76. The medium to long-term trend is still in their favour and selling momentum has picked up. Bulls will fiercely defend the low stamp of 124.27 over the next few days; this level will be vital in halting the current bearish pressure. Bulls will hope to reject the current lower prices and will aim to recapture the 125.50 handle to establish their presence. If buyers are able claw back losses this week, they will look to 126.54 as a key reference point.

Thursday’s ECB press conference produced a hawkish tone from Trichet with him expressing concern regarding short-term inflation pressures. Bond markets sold-off aggressively after the statement, as the market readjusted interest rate expectations from the ECB. It was interesting to note that the ECB’s own Orphanides said investors might have gone too far in pricing in higher interest rates and that markets ‘overreacted to the underlying message’.

On the supply front, Spain has a high level of issuance in 2011 and wants to secure as much funding as soon as possible this month. Today’s Spanish bond auction will now be a syndicated sale, replacing two auctions of bonds due in 2020 and 2024 that were scheduled for January 20^th. Many in the market feel this sudden decision to issue a lot of Spanish debt is very opportunistic given the previous successful auctions from Spain and Portugal this month. A poor Spanish auction, as a result of them ‘jumping the gun’ by issuing extra debt earlier than expected this month, will lead to some sound trading opportunities.

Important events this week.

• Tuesday: Zew Survey (GE), Citigroup & Apple earnings

• Wednesday: US Housing Starts, Goldman Sachs earnings

• Thursday: Phili Fed, MS earnings

• Friday: Retail Sales (UK), IFO (GE), GE earnings

Bull View

Bulls have lost their sturdy uptick in the market post Thursday’s ECB meeting. Buyers will strive to shore up their lacklustre performance in the market and steer the market back to higher ground. Their first target will be the 125.50 handle.

Bear View

Bears have picked up their game and pushed the market lower on the back of hawkish ECB comments. Sellers will be hoping the market has further follow through and will re-test the daily triple bottom at 123.76.

Futex View

We continue to be bearish on the bond market; the medium and long-term trend is still bearish. We will remain flexible and be very wary of any relief rally squeeze, rejecting the potential over-reaction to the ECB comments.

Overview

With the ECB’s latest interest rate announcement due on Thursday together with an array of peripheral European Government bond auctions in the early part of this week, the financial market’s focus is very much back on the Eurozone. Our Weekly Strategy Session included an assessment of last week’s Non Farm Payrolls figure and how the markets responded to the surprising news. We also look to draw conclusions from the associated price action to provide us with clues as to how the markets will move upon next month’s release.

Thought from the Traders

Last Friday witnessed a Non Farm Payroll figure of 103k versus analysts’ expectation of 150k. This disappointing news was countered by positives in the shape of an improved unemployment rate of 9.4% versus a prior 9.8%, and a revision to November’s Non Farm Payroll figure taking it from 39k to 70k. The markets’ sense of disappointment came after optimism was built up during the week as a result of an extremely high ADP Employment Change figure and a further decline in Initial Jobless Claims. Bond markets saw a strong rally on the back of the figure, whereas equity markets saw an initial drive-down and a rally going into the close. The movement in equity markets was to be expected and follows a pattern which has been seen in previous months i.e. a decline in the USD leading to strength in equity markets. This is something to keep in mind at the next Non Farm Payrolls; the USD has the ability to drive the equity markets giving you an opportunity fade the original move or exploit the momentum supported by a move in the USD.

As has been typical for the financial markets in recent times, the focus has quickly shifted from the US back to Europe and Monday morning witnessed a drive higher in peripheral European sovereign yields as the Eurozone crisis came back on the agenda. Irish yields remain at 9%, Spanish yields are up to 5.5% and Portuguese yields climbed to 7.5% sparking concerns not just about the state of the peripheral European sovereign debt markets, but the durability of the Eurozone as a whole. The key concern for market participants is whether Europe has the ability to bailout Portugal and Spain if things take a turn for the worse over the coming weeks. This negative sentiment is driving both Bonds and Equities down across Europe in the run up to Thursday’s ECB rate announcement and press conference chaired by ECB President Jean Claude Trichet. Throughout the press conference traders should be aware of the key points Trichet will discuss regarding ECB bond buying, escalating inflation and the ECB liquidity REFI operations. It is essential as a trader that you have a clear and concise plan detailing how both the market and you will respond to Trichet’s comments based on previous meetings and the condition of the markets leading into the meeting.

As illustrated in last week’s Weekly Strategy Session, it is your responsibility as a trader to establish which markets are correlated to the market(s) you trade. It is also vital to establish which factors are causing your market to behave in the manner which it does. This gives you additional profit opportunities and assists with risk/reward identification. Currently, European peripheral yields are leading indicators for both bond and equity markets.  Increases in peripheral European yields, as a result of growing concerns around the state of the Euro, are frequently causing declines in both of these markets.

The main focus for the novice traders this week follows on from last week’s strategy planning. This week they will be paying close attention to important technical levels/areas and the markets behaviour (price action) as when such levels are retested.  Previous significant highs and/or lows are of particular interest and value for our traders currently. Such levels present relatively low risk/high reward trading opportunities and are ideal for both our intra-day and long-term traders.

This time of the year also heralds the earnings season which is kicked-off by Alcoa, traditionally a bellwether for the rest of the market. This release, together with other early releases, gives a sound gauge of the economy as a whole and what effect subsequent releases will have on the markets. They give traders a good indicator of the type and size of the market reaction and how to approach the figures released over the rest of the period. N.b.  JP Morgan and Intel earnings are releases later in the week and are key for the markets.

Trading Tip of the Day: When trading you must continuously be asking yourself 2 key questions:

1. 1.       What is the market trying to do?
2. 2.       How successfully is the market achieving this?

 All our best traders ask themselves these questions before, during and after every trade. This constant analysis and reflection gives traders the ability to recognize the right opportunities to enter the market, when to exit and when to remain patient; all key traits in a profitable trader.

Summary

Gauging the sentiment of the market by paying close attention to the peripheral debt auctions on Tuesday, Wednesday and Thursday, as well as peripheral sovereign bond yields is essential to build a picture of the whole market. This is vitally important to allow you to build a foundation before Thursday’s ECB rate announcement which looks sure to provide trading opportunities for those that are well prepared.

4th January 2011
Bond Overview

Bond markets remained skittish over the holiday period with thin intraday aggressive moves. Normal volume is expected to return to the markets this week as the New Year kicks-off with the much anticipated US employment number, the main focus for the week.

Thoughts from the Trading Floor

From a technical perspective German Bunds held onto higher ground over the holiday period, largely bouncing between 124.40 and 125.68. The market appears firm with a strong rejection of the 124.50 handle and has probed towards 126 before hitting temporary resistance. The market will be expected to return to normal trading volume this week. It will be interesting to see which direction the market takes, thereby setting the tone for 2011. Bulls currently have the upper hand with strong support at 124.40 acting as a foundation for assaults higher. Buyers will be looking to test the 126 handle and break through, thereby recovering medium-term losses on the way back towards 127. Sellers still have the medium to long-term trend in their favour and a potential daily flag forming. Bears will look to take out support at 124.40 and proceed to retest the previous daily triple bottom at 123.93.

The start of 2011 has seen a continuation of the momentum of the late 2010 rally. Equities have held onto their strong gains and commodities have soared higher with Copper prices hitting record highs and Crude Oil fast approaching $100. However, Bond markets have shown no real signs of strength with both T-Note and Bund futures largely tracking sideways. It is interesting to note that for the first time on record, investors are demanding a smaller premium to own U.S. corporate bonds than global company debt. Bondholders demand 166 basis points more in yield to hold U.S. investment-grade company debt instead of Treasuries, compared with an average 169 basis-point spread worldwide. This is a strong indication of the level of high optimism currently held in the US over the strength of the economic recovery and the future course of the economy in 2011.

Important Events this week:

Tuesday: US FOMC Minutes
Wednesday: US ADP Employment Change, US ISM Non-Manufacturing Composite
Thursday: US Initial Jobless Claims / Continuing Claims
Friday: GE Industrial Production, US Non-farm Payrolls, US Unemployment Rate

Bull View

Bulls have found a stable footing in the market over the past several weeks, yet it is worth bearing in mind that this strength was formed under thin trading conditions. Bulls will be looking to cement their slightly positive foundations in the market and build into higher ground, with the first main objective a probe of the 127 handle.

Bear View

Bears will be keenly looking at the potential daily flag formation in the Bund, creating a strong new entry point for new sellers with both short-term and long-term perspectives. Bears will be looking to re-test the main support level lying at 123.93.

Futex View

We continue to be bearish on the bond market as the medium and long-term trend is still down. We will analyse the market’s reaction post the US employment number which will give clarity to the short-term direction for the coming weeks.

21st December 2010
Bond Overview

German Bunds have shown their first real taste of buying pressure in weeks, bouncing off a rare daily triple-bottom pattern at 123.76 in the March contract. Appetite for Bunds continues to surge on renewed European debt risk with the crisis potentially engulfing countries such as France and Belgium.

Thoughts from the Trading floor

From a technical perspective, the daily chart produced a triple bottom at 123.76 which triggered a bounce. The momentum indicators have dramatically shifted their bearish tone to a more bullish one over the week, with clear scope for further moves higher. Bulls will look to surmount resistance at 125.36/47 before the emerging bullish view can be cemented. Sellers cannot be ruled out with a return to lower ground on light holiday volume a real threat. Sellers will need to re-break the key resistance at 124.26 before any attempt can be made at new monthly lows.

The European debt crisis has been weighing on the markets for over a year, with Greece the first to fall victim to widening yield spreads and Ireland following close behind. Now it appears that contagion has begun to spread to the stronger powerhouses of Europe, with Belgium whispered for an imminent downgrade and fears that France could lose its AAA rating. This was highlighted yesterday with French 5-year CDS’s hitting record highs, making them more expensive than lower-rated equivalent securities for countries such as the Czech Republic and Chile.

Across the pond, the gap between US 10 and 30 year Treasury bond yields shrank from a record 1.60 basis points on the 15th of December to 1.05 basis points; the fastest contraction since the 1980s. Under normal economic cycles, a flattening in the yield curve indicates an end to interest rate cuts and the need to stop stimulating growth in the economy. The narrowing of the 10-30 yield spread shows that investors expect a stable recovery and an increase in growth expectations. This begs the question - have we have seen the last of the QE programmes? If not, a further dose of QE in the US economy could actually undermine the economy’s recovery process and have long-term repercussions.

Important events this week:

Wednesday: UK GDP (Final), US Personal Consumption and US Existing Home Sales
Thursday: US Initial Jobless/Continuing Claims, US Durable Goods, Personal Income, PCE Core, US Uni. Of Michigan Confidence, US New Home Sales
Friday: Christmas Eve US/UK Bank of Holiday

Bull View
Bulls have made their presence felt in the market over the last few days but it is still too early to say whether we are embarking on a significant bounce. Buyers will have to break 125.36/47 and then look higher to a longer move back up to the 127 handle.
Bear View
Bears still control the medium to long-term picture and still clearly have the upper hand. Sellers have strongly rejected any relief rally over the last 3 months and will look to do so again.
Futex View　

We are still bearish bonds. The medium to long-term trend is still pointing to lower ground, yet our expectations for when this will happen have been pushed out due to the choppy holiday trading period. We will reassess the market more clearly once normal trading volume returns in the New Year.

Focus on the US Dollar vs. the Japanese Yen (USD/JPY)

The Bank of Japan surprised markets by cutting interest rates to a target range of 0%-0.1% and announcing that they have set aside $60 billion to fund a programme to buy government bonds and (more...)

Focus on Oil

The oil market has been range-bound this last week, with neither bulls nor bears gaining control, despite volatile movements in the equity markets. There has been a new sense of independence in the (more...)

Overview

Over the last five days we have seen the Bund and US Ten Year come under pressure on the back of a strengthening Euro and rebounding equities. (more...)