Overview

This week’s Strategy Session focused on the identification of specific price patterns in the market, how to avoid enduring big losses and the importance of having a big picture view of markets you trade.

Thoughts from the Trader

Last week, as global equity markets generally sold off, the Euro Stoxx 50 remained relatively bullish as the peripheral sovereign debt crisis stabilised. The stabilisation was as a result of the introduction this week of the European Financial Stability Facility (EFSF) Euro Bond and the expected demand from Japan and China for the new asset. Their support of the bond led to a positive expectation surrounding this week’s auction. Highlighting this strength was an atypical correlation between the Euro Stoxx 50 and both the Dax and FTSE 100. As and when selling pressure dried up in these two markets, the Euro Stoxx 50 strengthened immediately, sparking the rally we saw throughout the week.

The opposite was witnessed in the Bund market which sold-off last week, putting the Bund under further pressure going into this week. Yield spreads in the Eurozone continued to tighten aggressively and even the political unrest in Ireland failed to trigger any further widening. Credit Default Swaps (CDS) also shrugged off the news and appear to have fully priced-in the whole Eurozone crisis. With regards to the state of the Eurozone, the EUR/CHF is a key market that traders should be well aware of. This currency pair acts very much as a lead indicator and its recent rally indicates a level of stability and certainty regarding the Eurozone. Interestingly, the Bund witnessed increased volumes last week after the quiet conditions over the Christmas period.

Looking forward to this week, our Senior Traders emphasised particular strategies/patterns that all of our traders should be paying attention to. They also reiterated the importance of remaining patient in the market. They reminded the forum that being able to consistently extract 2 ticks/hour from the market would be enough to enable you to grow your account over time. The forum was also reminded of the importance of having a sound understanding of the big picture of the markets. It is a trader’s responsibility to gauge the big picture and how it changes over time in order to spot cross market correlations and lead indicators. For example, the behavior of both the Dax and FTSE 100 Index last week aided our Senior Euro Stoxx traders.  The associated strength in the EUR/CHF along with the tightening of European yield spreads were sound primary indicators of an increased desire for European risk assets and the diminishing appeal of Bunds as a safe-haven.

Further to the Bund’s weakness, both the Schatz (German 2-year Bond) and Bobl (German 5-year Bond) sold-off throughout the week on heightened fears of impending interest rate hikes. These fears triggered a flattening of the yield curve. The sustained selloff in the Bund was interspersed with strong blips as a result of aggressive buying as traders executed spread trades, selling particularly the Schatz and buying Bunds. It is imperative that Bond traders are aware of these sorts of price patterns and the accompanying logic behind them. With knowledge of such patterns, traders should exercise caution when selling into aggressive breakouts due to the recent trend of the Bund retracing strongly back into its previous ranges.

The increased volatility in the Bund market provides both opportunity and risk. As a result, ensuring stops are effective and kept relatively tight is of paramount importance. Slack stop management and a lack of discipline to take effective losers can quickly result large losses and being stopped out for the day. As a trader you must live to fight another trade and must continuously ask yourself “is the reason I entered this trade still valid?” If this is not the case, you should immediately exit your position.

In terms of fundamentals, this week we have the FOMC meeting on Tuesday evening with no action expected to be taken by the Federal Open Market Committee. As a result, this increases the chance of a significant price shift if any action were to be taken, as it will not be priced-in to the market. Sound preparation is thus vital to seizing such rare opportunities. On Friday the US GDP report will be released and the market reaction to both a strong or weak figure will be fascinating for traders. A weak figure will be linked with the high possibility of the introduction of more Quantitative Easing.  A strong figure, even though positive, could be associated with the market’s current inflation fears and increase the chance of interest rate hikes. In the UK we see the release of the Bank of England Minutes on Wednesday which will be of particular interest due to the current elevated level of inflation. The Minutes may reveal whether the Monetary Policy Committee has become more hawkish and when the expected future rate hikes can be expected.

Summary

Once more Futex traders have had their attention focused on the importance of “the big picture”. Going into this week’s trading their ability to spot those markets which are lead indicators and are going to present them with opportunities is of key importance. With the FOMC meeting, BOE minutes and the US GDP figures being announced this week, opportunities are expected to come thick and fast which means all round knowledge and thorough preparation will be essential in the quest for profitability.

25^th January 2011

Bond Overview

Bonds grinded lower last week, with the market still feeling the pressure of inflation fears. German Bunds entered fresh monthly lows printing 123.35. The market will look forward to a busy economic week with key GDP data out of both the UK and US, along with the ever-important FOMC Rate Decision.

Thoughts from the Trading Floor

From a technical perspective, German Bunds continued to tread a bearish path. The market extended to the downside breaking through the daily triple bottom at 123.76, making a low at 123.35. The trend is still bearish from the chart view, with momentum indicators continuing to drop into negative territory and it is likely that sellers will still be dominant over the coming days. A break below 123.35 would be grim news for any buyers. Bulls will be hoping to keep the market above the key triple bottom level at 123.76 and from here they may be able to stabilise the market and build a value area platform to halt the current bearish grind. Buyers will also be hoping to snap back through 124.36 and if successful may be able to buy themselves some breathing room to stage a more meaningful advance with important target levels at 125.05 and 126.54.

The European Central Bank now owns almost 20 percent of the outstanding government bonds of Greece, Ireland and Portugal via its Securities Markets Programme. Due to this, the ECB is distorting the market pricing in the periphery creating a deformation in the CDS and Cash bonds relationship. From this European leaders are considering assisting struggling countries to potentially buy-back their own distressed debt. This would in theory allow countries like Greece to restructure their own debt in the open market. If effective, this bond buyback proposal could solve the tricky problem of lowering a country’s debt without having to default, even after the EU bailouts. The way the ECB handles the EFSF and the transfer of ownership of their peripheral debt over the coming months will be key in solving the crisis.

Important events this week

• Tuesday: GDP (Advanced) (UK), Consumer Confidence (US)

• Wednesday: New Homes Sales (US), FOMC Rate Decision

• Thursday: Durable Goods Orders (US)

• Friday: GDP (Advanced) (US)

Bull View

Bulls need to re-establish themselves back in the market by maintaining support above 123.76 if they are to keep their heads above water. Ideally buyers will need to reach 125.05 to assert their presence.

Bear View

Bears continue to thrive and make steady progress in the market. Sellers will look to accelerate the trend as momentum indicators have picked up and they should capitalise on their advantage.

Futex View

We maintain our bearish outlook on the bond market as prices are still declining and we will follow the trend. There is no reason to change our perspective either fundamentally or from a technical view.

24^thJanuary 2011

Equity Index

Overview

Last week the US equities lost ground for the first time in 2011 as fears of the Chinese economy overheating gripped the market. This week traders have a lot to get their teeth into; we will see the releases of the latest GDP numbers in the UK and US as well as the FOMC Rate decision. In addition earnings season continues with many US firms including Microsoft and Caterpillar releasing figures.

Thoughts from the trading floor

From a technical perspective the S&P 500 continues to look strong, however at current they are struggling to hold above support at 1277.00. A failure to hold above 1277.00 could see the market fall back to 1245.50 with further support found at 1216.00.

In the last few weeks we have seen Trichet warn of short term inflation risks at the latest ECB press conference whilst UK inflation continues to rise to worrying levels. This poses the central banks with a serious dilemma, it is clear that the main drivers in the recent inflation rise are commodity and Oil prices; not overheating domestic economies. In such instances we can consider that the inflation is being imported and rate rises will simply sacrifice domestic growth to the benefit of countries currently better positioned. However the central banks mandate stipulates that they must control inflation, to do so their main tool is interest rates. Rate changes are a crude tool which fail to provide the subtlety central bankers crave but at this stage they find themselves with few options.

If inflation continues to rise particularly in the UK we may see the BOE forced into a rate move they struggle to justify from a macro growth perspective but they deem necessary to stave off price rises. This would have a serious negative impact on any recovery as it would put overwhelming pressure on mortgage and credit markets placing substantial downward pressure on house prices and spending levels. This would undoubtedly have a large negative impact on equities as future growth levels would be revised much lower. The main way that such a scenario may be avoided is if we see a drop off in world commodity prices, the most likely catalyst for this being a slowing in the Chinese economy. This could either come about naturally or more likely through aggressive tightening in monetary policy. In either scenario world equity markets would take a nose dive as so much current world growth levels are associated with China. Considering all of this any further signs of inflation in the UK or Europe may be the signal that the current bull market is reaching its peak.

Important events this week.

• Tuesday: GDP (Advanced) (UK), Consumer Confidence (US)
• Wednesday: New Homes Sales (US), FOMC Rate Decision
• Thursday: Durable Goods Orders (US)
• Friday: GDP (Advanced) (US)

Bull View

Bulls will now be targeting resistance at 1313.50 hopefully aided by strong data releases this week. Their main concern will now be profit taking as investors look to realise profits after 18 months of strong performance.

Bear View

Bears will desperate to see the S&P drop below 1277.00 opening the door for a break lower. Continued inflation fears could support their cause.

Futex View

We believe that the current bullish trend in equities is coming to an end and a pullback is around the corner. When it finally arrives it will likely be aggressive; further European sovereign concerns may provide the catalyst for the move.

Weekly Strategy Session

Overview

With the latest Federal Open Market Committee (FOMC) meeting taking place on Tuesday evening, this week’s strategy session turned from the peripheral European sovereign debt crisis to the current situation in the US.

Thoughts from the Traders

The previous FOMC meeting saw the introduction of Quantitative Easing Round 2 (QE2) by the Federal Reserve. Our traders do not expect any further action on Tuesday as there has been insufficient time for the markets to fully digest this latest policy move. However, government bond yields in the US have risen in the last few weeks which could cause the Fed to introduce further QE in the not too distant future. Discounting the latest Non Farm Payroll Employment Data, the smaller US indicators have been strong/stable causing growth expectations to rise and the perceived threat of deflation to no longer be a leading concern.

Sustaining growth in the US by keeping bond yields down is very much at the forefront of the Fed’s intentions, hence the introduction of QE (and QE2). However, fears have grown following suggestions by Moody’s credit rating agency that the AAA credit rating given to the US could come under threat as a result of the ever-growing budget deficit. These comments followed the decision to extend the Bush-era tax cuts for a two-year period.

The US Government yield curve has steepened as a result of rising 10 and 30 year bond yields. In the past, a steep yield curve has been witnessed at times of economic growth. Therefore, this phenomenon is of less concern to the market than a sharp rise in short-term yields which would cause a flattening of the curve. Such a move would be of significant and something to be very aware of as it will be interpreted as a leading indicator to further Fed action.

Another area of concern to be addressed by the FOMC is the unemployment level which has risen to 9.8%. The low unemployment levels of 2007, around the 7% mark, seem to be a distant memory. With the unemployment rate increasing towards 10%, it is becoming a factor in need of serious attention by the US Government and the Fed; something traders must remain well aware of.

Trading Tip: When trading you must constantly be searching for the indicator(s) which leads price movement in the markets you are trading. For example, we previously discussed how strength in the USD was correlated to weakness in the equity and bond markets. These indicators come and go and it is your job to identify them swiftly.

The current mood surrounding equities remains bullish and therefore clever money, leading up to January, will be looking to buy any dips and then sell at new highs. December is known to be a time for rallies in equity markets so this must be the sentiment after the first week.

Returning to the situation in the Eurozone, these events (e.g. concern over peripheral Sovereign debt) are producing regular news, albeit in small doses. As a result, their influence over the market comes and goes. This week, the focus for the Eurozone is the vote on Wednesday in the Irish Parliament on the EU/IMF financial aid package and Tuesday’s vote of confidence concerning the Italian Prime Minister. The Irish vote is crucial for the markets because a rejection by the Irish Government of the bailout package will raise questions surrounding the credibility of the Eurozone and undermine confidence across other European nations. In Italy, a vote against the current leader could lead to an election which would delay austerity measures and lead to further climbs in Italian Government bond yields. In turn this would escalate fears that the Eurozone’s third largest economy will become the next country to require bailing-out.

Summary

The situation in the US should take centre stage this week with the focus being the FOMC meeting, speculation regarding the QE programmes, tax cuts, unemployment, the budget deficit and increasing yields. The primary focus for the first time in a few weeks is no longer the Eurozone crisis but it remains essential that the situations in both Ireland and Italy are monitored closely and that the German economic indicators remain positive so as not to reignite concerns.

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