11th February 2011
Macro overview

Focus on the Peripheral markets (debt and equities).

Yesterday saw peripheral debt markets come under pressure during the morning session. Yields on the Portuguese 10yr paper moved briefly to Euro lifetime highs and peripheral spreads across the board moved in sympathy with these moves. As a result, peripheral equity markets also moved sharply lower.

Thoughts from the trading floor

Portuguese 10yr yields moved through the 7.5% level yesterday, which roiled peripheral markets as a whole. This was the highest level since the previous Euro lifetime highs made in November last year. During that time there was a lot of talk that Portugal would need to go to the EFSF for a bailout. However, as we have seen previously, the ECB was quick to intervene in the markets by buying peripheral debt in an attempt to prevent another round of panic liquidation; moving yields back to the 7.00% mark by the end of the day. It has become clear of late that perhaps the only real buyer of peripheral debt is the ECB, and this may serve to unnerve other genuine buyers. The market may now really start to feel that the ECB’s interventions are producing a clear disconnect to reality, which may ultimately render the ECB interventions futile.

In sympathy we have seen peripheral equity markets come under pressure. The Spanish Ibex, Greek ASE and the Euro Stoxx 50 have started to trade off their recent highs. However, we have yet to see the Euro vs. the Swiss Franc reflect these macro developments. Therefore, if we continue to see deterioration in peripheral debt, we are likely to see the peripheral stock indices and Euro/CHF come under real pressure. At this point we may see the end game play out as far as Portugal is concerned.

Bull View

Bulls will hope that the ECB interventions can stabilise the markets long enough so that the comprehensive EFSF extension programme, to be announced in March, can ‘save’ the markets. As far as risk markets are concerned, bulls will look at the recent pull back in the last 2 days as a buying opportunity.

Bear View

Bears will look for the end game as far as Portugal is concerned to begin. Any correction in global risk markets may be enough to re-catalyse the European debt crises.

Futex View

We favour the bears. We feel that the Eurozone debt crises will reach its logical conclusion - peripheries needing bailouts - during the course of this year. We should see the weakest links start to go by this quarter-end.

8^th February 2011

Bond Overview

Bonds tracked lower last week despite a mixed US employment picture. Both US and German 10 year bond futures dropped, leaving US 10 years yields at over 3.69%, the highest since May 2010. With a light economic calendar this week, the main focus in the market will be the BOE rate decision on Thursday and large T-Note issuance across the curve.

Thoughts from the Trading Floor

From a technical perspective, German Bunds veered lower again last week as selling pressure continued. Bunds touched a low print of 122.42 yesterday.  Deeper support levels include 122.11/121.87 and the important yield barrier of 3.5%; current German 10 years yield stand at around 3.24%. On a brighter note, bulls need to re-emerge with some meaning and make an impact in the market. Buyers will be looking to keep their heads above 123.17 and then onto stronger resistance at 123.76. If this level is taken, it may be an early sign of further upside gains to come. Higher daily barriers can be found at 124.36 and 125.05.

On Thursday we will see the BOE rate decision. There have been whispers and much speculation over the past few days of a potential early rate hike. Some market participants are saying there is a ‘decent chance’. However, the odds are stacked against such a move from the Bank of England. Major investment banks are not pricing in such a move until March or April at the earliest and even these “guesses” are ahead of the general consensus.  Yet we have seen recently fresh monthly highs in two, five and ten year UK Gilt yields. A small hike could still leave the BOE in a loose monetary policy stance and reduce the risk of aggressive future interest rate moves. The BOE do need to maintain their creditable stance on tackling inflation and need to manage expectations accordingly. If January’s CPI is exceptionally high (the Monetary Policy Committee already knows the data) then there could be an outside chance of a move.

Important events this week

• Thursday: BOE Rate Announcement
• Friday: University of Michigan Confidence

Bull View

Bulls failed again last week to halt the slow bearish trend. Failure to capitalise on a messy US employment number and the inability to hold any support levels have left buyers with no place to go. Bulls will need to aggressively reject this current lower territory before re-establishing themselves in the market.

Bear View

Bears continue to thrive and make steady progression in increasing bond yields. Sellers have the upper hand and are relentless in their grind lower, indicating further losses to come. The grand target of 3.5% in the 10 year German yield is still a little way off.

Futex View

We are still bearish on the bond market, with rising yields across major bonds. There seems to be little response coming from bond buyers. The trend is still firmly down and we are still following it.

20^th January 2011 

Currency Overview

Euro vs. the US Dollar (EUR/USD)

The Euro staged an impressive recovery last week, stunning many market participants. The dominating rally drove prices from the low monthly print of 1.2869 to smashing the 1.3500 handle. Last week changed the profile of the market in the short to medium term towards a more bullish picture.

Thoughts from the trading floor

The EUR/USD March Future bounced aggressively off monthly lows at 1.2869. Buyers grasped control driving the market higher to break resistance at 1.3050, 1.3157, 1.3234 and 1.3428 before finally touching a temporary high at 1.3534 yesterday. Bulls are in the ascendency at present but with such volatility prices can easily swing around dramatically. Late buyers will be looking at interim support at 1.3428 to re-enter the market. On the upside, bulls should be looking at 1.3683 in the coming weeks, but for this to happen buyers will need to build a new value area above 1.3495. Sellers got hammered last week and will look to re-emerge hoping to fade the potential ‘overbought’ rally and retrace the market back below 1.3428 support. 

Hawkish short-term inflation comments during the ECB press conference last week sparked fears of a sooner than expected Eurozone interest rate hike, propelling the Euro higher. ECB members quickly tried to cool the situation by underplaying the inflation issue. ECB’s Nowotny expressed his opinion that inflation will remain below the ECB’s 2 percent target in the medium-term. Many analysts viewed the markets’ response to the hawkish comments as an overreaction to the underlying text, but the market still rallied strongly in the days after the press conference.

Last week the Dollar fell to its lowest level in almost two months. The strong decline in the Greenback has largely been attributed to signs of a lethargic US recovery and European officials continuing to be proactive on the debt crisis. Germany’s Finance Ministry yesterday squashed speculation that they were looking into ‘restructuring’ Greek debt. 

Bull View

Bulls came out of hiding last week and shocked the market with a complete upward reversal helped by Hawkish ECB comments. Bulls this week will hope to consolidate current gains and hold this higher ground, with aims at a longer term sustainable rally over the coming weeks.

Bear View

Bears have been knocked hard, with all of January’s early selling pressure being completely overturned. Sellers this week will look to fade the over-extensions of key daily resistance levels at 1.3495 and 1.3428.

Futex View　

We are still bearish in the medium to long term although the short-term trend is clearly up. We will be looking to fade any irrational overextensions of key daily resistance as we believe the market has rallied ‘too far, too fast’.

The Eurostoxx continued to surge higher yesterday.... (more...)

The Dax continued to push higher yesterday.... (more...)

The Bund continued to trade lower yesterday.... (more...)

The Eurostoxx traded lower yesterday...... (more...)

The Dax traded marginally lower yesterday.... (more...)

The Bund closed around unchanged on the day yesterday..... (more...)

The Eurostoxx pushed further higher yesterday.... (more...)