19th January Bond Futures Overview
19th January 2010
Bond Futures
Overview
Over the last five days we have seen longer dated government bond futures drive higher after a couple of weeks of consolidation. The Bund hit a 2010 high yesterday of 122.78 amidst quiet trade due to the US bank holiday. This week all eyes will be on US earnings with many US financials reporting.
Thoughts from the trading floor
After a week of bullishness the Bund has broken above daily resistance at 121.85 and 122.59. Further significant resistance is at 122.85, this represents a gap close formed as part of the aggressive December sell off. If the Bund was to break above here it would open the door for a test of 123.53 and then possibly 124.06. A failure at 122.85 would not be a disaster for bulls, daily support lies as 122.24 which may prove to be a pivotal level. The US Ten Year has also pushed higher with the next daily target at the 118.080 resistance; a break of here may see a test of 119.000. To the downside support lies at 116.270 and beyond that at 116.085.
This morning we had the release of UK inflation data which provided an upside shock that adversely affected Bond prices. Core CPI YOY was expected at 2.6% but jumped to 2.9%, just shy of the 3% level at which Mervin King has to write a letter to the Chancellor. The UK Gilt future dropped almost 100 prices with the Bund dropping over 50. This will have undoubtedly been caused by some traders fearing that a UK rate hike could occur sooner than previously thought. We believe that this move could well be overdone and that a continuation over the next few days is unlikely. This is predominantly based on comments made by King several months ago in which he indicated that as part of the recovery there may be a spike in CPI but this would be a short term phenomenon.
This week we will see the release of several key earnings as well as US PPI and Housing Starts. With so much fundamental data being released we expect price action to be very choppy but little direction to be discovered until next week.
Bull View
Bulls will be very aware of the importance of breaking above 122.85 if the current upward momentum is to be sustained. If the housing number demonstrates further weakness this could provide the catalyst for this.
Bear View
Bears will have taken hope from this mornings UK inflation number and will be banking on this being the first sign of monetary and fiscal policy led inflation. If this proves to be the case we could see a dramatic sell off in government bond markets over the next few months.
Futex View
We believe the Bund and US Ten Year will consolidate around these levels before moving higher as fears of a double dip scenario increase on the back of a faltering housing recovery in the US. In the medium term the Bund will test and break 124.06 and the US Ten Year will reach 119.000.
