The Gilt remains in a trading range that has dominated the market since June of this year and may yet persist further. But in recent weeks the market has rejected an attempt to break through the highs and is now within striking distance of the lows. Has anything changed or is the market still basically directionless?
The Technical Trader's view
MONTHLY CHART
The market looks poised on the support from the Prior High at 116.08.
DAILY CHART
And the detail of the consolidation suggests a possible complex Head and Shoulders top formation close to completion. Watch for a second close beneath that neckline currently at 115.86
A confirmed completion of that H&S pattern would signal a break of the long-term horizontal support at 116.08.
A second bear short-term bear trigger to watch would be a breakdown beneath the Prior Low at 114.26.
The Macro Trader’s view:
The Gilt remains in a trading range that has dominated the market since June of this year and may yet persist further. But in recent weeks the market has rejected an attempt to break through the highs and is now within striking distance of the lows. Has anything changed or is the market still basically directionless?
We judge the dynamics driving this market may have changed sufficiently for the Gilt to attempt a bearish breakout. The reasons are:
1. The Government singularly failed to tackle in a convincing way the debt build up that has occurred as a result of the recession and fiscal stimulus deployed to contain it.
2. The economy remains in recession. The 3rd quarter was flagged as the moment when growth resumed, it didn’t happen, now all eyes on 4th quarter GDP, but industrial production and manufacturing output has remained surprisingly week, and only today retail sales undershot consensus by a significant margin.
3. The build up of debt needs financing and borrowing cost are set to hit £60.0B, the government has made little mention of this, but it is double the defence budget.
4. The ratings agencies are hovering around the UK’s sovereign AAA rating; so far they have only made reference to what needs to be done, but the inference is that if nothing happens, the rating will be lost, resulting in yet higher interest payments.
So what has supported the gilt over the last few months? Clearly the recession itself offered support in the early stages, as it was judged prudent to use fiscal measures to prevent a financial market meltdown. With growth turning so weak the outlook for inflation relaxed so much that deflation was feared.
The authorities responded with a QE program, designed to support the government debt market and at the same time expand the money supply sufficiently to turn deflation back to mild inflation.
And that policy seems to have worked. CPI, the targeted measure stands at 1.9% against a target of 2.0%. Moreover the Bank of England has forecast it to spike higher over the short term before dropping back.
But over recent months, the Bank’s record on forecasting lower inflation hasn’t been too good. If the spike in inflation doesn’t fall as expected, the market will be exposed to true trader sentiment. The QE program is scheduled to end in February. Then, in an environment where debt is at record levels, inflation is proving problematic, the Pound is weak and growth is barely visible, who would want to buy the gilt?
The only visible support is an election is due in May/June next year. The opinion polls have long forecast a strong Conservative win, but the lead in the polls enjoyed by the opposition Conservative party over the ruling Labour party has started to narrow. Why does this matter?
Well put simply, the main parties have different approaches on how to reduce the deficit. The Conservatives want to slash public spending, which will allow the private sector room to flourish, the Labour government will raise tax, and that will restrict private enterprise, and condemn the economy to years of slow growth making the deficit more entrenched and harder to reduce.
The markets may have traded sideways recently due to expectations of a change of government and policy, but if the opinion poll lead narrows much further, traders could become aggressive sellers of the gilt, and after last week’s pre-budget report we think there are signs that might be starting to happen already.
Mark Sturdy
John Lewis
Seven Days Ahead
For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com
Friday, 18 December 2009
Thursday, 17 December 2009
US Dollar Bulls Stirring, But Not Yet Wide Awake
The FX Trader’s view - Over the last few months the US Dollar Index has continued to grind lower, recently reaching/eroding a long term 76.4% ‘support’ level. Subsequent to this there has been a positive reaction, with s/term bull signals beginning to mount.
- MONTHLY CHART: The main sign in 2008 that long term bears were losing momentum was the breach of the bear channel top projection. Subsequent resistance was found from the 38.2% recovery level. The 76.4% pullback level is so far having a supportive influence (note this has worked well in EUR/USD too – see last week').
- DAILY CHART: In the FX Specialist Guide we have repeatedly stated that it is possible we have been seeing a third/final downleg (from 81.466 08-Jun high) in the move that commenced from the 89.624 Mar high. The recent violation of the bear channel top is encouraging for early bulls, while a close above the 76.817 03-Nov high now provides an initial bull signal. Recovery through prior 77.428/77.688 lows (with current 23.6% level just above) would provide next confirmation of a temporary Dollar recovery underway, and we could next target the 80.000 38.2% recovery area. S/term dips would be viewed as temporary.
[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]
Pullback in Gold Looks Set to Continue
The Commodity Specialist view - The uptrend in Gold over the last few months was characterized by steady acceleration and muted setbacks. The 27-Nov Dubai sell-off, albeit brief, suggested growing fragility and, after certain Fibonacci projections were reached, the market finally started to let off steam. There should be further downside prior to resumption of the long term uptrend.
- WEEKLY CHART – CONTINUATION: The acceleration upwards in the second half of 2009 recently reached the Fibo projection we had shown in the Commodity Specialist Guide, at 1220, 1.618 swing off prior 1014.60/681.00 2008 downmove. Reaction here has been negative, prompting a pullback phase. On this chart note potentially strong support from the prior highs above 1000.
- DAILY CHART – FEB-10: On this chart the uptrend failed just ahead of a growth projection we had calculated. When the first dual Fibo support just above 1150 was breached a pullback phase was confirmed. The next dual Fibo support just above 1100 is so far being effective, but any s/term strength is seen as temporary ahead of a further slip. The 61.8% & 76.4% bounce levels at 1183 & 1200 should indicate the maximum extent of any s/term recovery. Next target is the lower support area in the 1070s, which includes 50% and 76.4% levels, and 14-Oct high. Ultimately support from around the 1012.90 Feb high should hold, but at present it is hard to gauge whether this will be seen.
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Friday, 11 December 2009
The politics of the Pound v Dollar and Euro
The pre-budget report was never going to announce any measure that risked upsetting the already slim chance of Labour's re-election. The markets seem to understand this and have decided that the Pound should be given the benefit of the doubt with only 5 or 6 months to go until a new government is elected.
Sterling's politics v the Dollar and the Euro.
The Macro Trader's view:
This week's pre-budget report was, broadly speaking, a disappointment. It has been judged broadly fiscal neutral, with all the tough spending decisions deferred until after the General election due by May/June of next year, despite assurances to the contrary by Chancellor Darling.
The headline measure, a punitive tax on Banker's bonuses, is little more than a populist measure designed to please the Labour party faithful and assuage perceived public outrage over bonuses paid to a group of workers whose firms are only still in business because of a tax payer funded bailout.
Why then, is the Pound not under greater selling pressure? The ratings agencies, Moody's in particular, have questioned the sustainability of the UK's AAA sovereign credit rating. The implication is that without a credible deficit reduction plan, the rating could be lost, which would increase the cost of funding the public deficit and make reducing it even harder.
And although Darling claimed in the pre-budget report that the deficit will be halved over the next four years, the statement looks long on aspiration and short on explanation of how it is to be achieved.
In reality, the Chancellor is first and foremost a politician and retaining power is his priority. The ruling Labour party are seriously behind the opposition Conservative party in the opinion polls and look like leaving office after next year's election. The pre-budget report was never going to announce any measure that risked upsetting the already slim chance of re-election.
The markets seem to understand this and have decided that the Pound should be given the benefit of the doubt with only 5 or 6 months to go until a new government is elected. If Labour were unexpectedly to win they would raise tax as a means of cutting borrowing with spending cuts taking less of the strain. If the Conservatives win, they have declared that spending cuts will be their main route to cutting the deficit back sharply. The reason for the Pound’s resilience arises from the polls prediction that they will have a decent working majority.
Yet the Pound’s performances against the Euro and the Dollar are slightly different:
· Against the Euro it has remained within a broad trading range that has dominated since October, and although the Euro zone has already emerged from recession, there are negatives about Euro zone public finances too.
· Against the Dollar the Pound has weakened recently, and looks vulnerable to further selling.
Why the relative weakness against the Dollar (albeit slight) which has been weak itself for so long? The Dollar is currently enjoying a correction that is fuelled by lingering concerns over the Dubai debt rescheduling drama and a stronger-than-expected US non-farm payroll report released last Friday which aroused fears of an early turn in the US monetary policy cycle.
While that has been denied by Fed Chairman Bernanke, the markets are suspicious.
In any case, the US is out of recession whereas the UK is not.
The Technical Trader’s view:
Sterling v Dollar and Euro long-term
WEEKLY DOLLAR / STERLING CHART
In the long-term Cable chart the pressure on Sterling arises from repeated failure at a clear band of resistance
1.6802- 1.7020 throughout 2009.
But there is no completed Top yet in place (that requires a breakdown through 1.5709).
So the market is not immediately in the grip of a medium-term force. (The modest support from the rising diagonal is being tested right now and may provide further clues.)
WEEKLY EURO/STERLING CHART
In the Euro/Sterling, the long-term chart shows the weakness of Sterling from mid 2009 to have arisen from the formation of a continuation pattern a bull falling wedge which completed in September this year.
(Of course, wedges are not the strongest of indicators.)
It would be much clearer for the Sterling bears if the possible Neckline above the market at 0.9380 were to be breached....completing a bull H&S pattern
Sterling v Dollar and Euro long-term
DAILY DOLLAR/STERLING CHART
Short-term, in Cable a small Head and Shoulders Reversal looks to have completed - though we need a confirming close beneath the neckline at 1.6294 today.
The minimum target of that pattern is more or less the critical Pivot at the Prior Low at 1.5709....
DAILY EURO/STERLING CHART
Short-term, against the Euro, the picture is strangely congruent with the long-term chart.
The market is again in the grip of a bull wedge (created, note well, by the solid support from the Prior High at 0.8838).
The Fibonacci 50% resistance may be proving troublesome, in any event, there is no very short-term pattern driving the market
Mark Sturdy
John Lewis
Seven Days Ahead
For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com
Sterling's politics v the Dollar and the Euro.
The Macro Trader's view:
This week's pre-budget report was, broadly speaking, a disappointment. It has been judged broadly fiscal neutral, with all the tough spending decisions deferred until after the General election due by May/June of next year, despite assurances to the contrary by Chancellor Darling.
The headline measure, a punitive tax on Banker's bonuses, is little more than a populist measure designed to please the Labour party faithful and assuage perceived public outrage over bonuses paid to a group of workers whose firms are only still in business because of a tax payer funded bailout.
Why then, is the Pound not under greater selling pressure? The ratings agencies, Moody's in particular, have questioned the sustainability of the UK's AAA sovereign credit rating. The implication is that without a credible deficit reduction plan, the rating could be lost, which would increase the cost of funding the public deficit and make reducing it even harder.
And although Darling claimed in the pre-budget report that the deficit will be halved over the next four years, the statement looks long on aspiration and short on explanation of how it is to be achieved.
In reality, the Chancellor is first and foremost a politician and retaining power is his priority. The ruling Labour party are seriously behind the opposition Conservative party in the opinion polls and look like leaving office after next year's election. The pre-budget report was never going to announce any measure that risked upsetting the already slim chance of re-election.
The markets seem to understand this and have decided that the Pound should be given the benefit of the doubt with only 5 or 6 months to go until a new government is elected. If Labour were unexpectedly to win they would raise tax as a means of cutting borrowing with spending cuts taking less of the strain. If the Conservatives win, they have declared that spending cuts will be their main route to cutting the deficit back sharply. The reason for the Pound’s resilience arises from the polls prediction that they will have a decent working majority.
Yet the Pound’s performances against the Euro and the Dollar are slightly different:
· Against the Euro it has remained within a broad trading range that has dominated since October, and although the Euro zone has already emerged from recession, there are negatives about Euro zone public finances too.
· Against the Dollar the Pound has weakened recently, and looks vulnerable to further selling.
Why the relative weakness against the Dollar (albeit slight) which has been weak itself for so long? The Dollar is currently enjoying a correction that is fuelled by lingering concerns over the Dubai debt rescheduling drama and a stronger-than-expected US non-farm payroll report released last Friday which aroused fears of an early turn in the US monetary policy cycle.
While that has been denied by Fed Chairman Bernanke, the markets are suspicious.
In any case, the US is out of recession whereas the UK is not.
The Technical Trader’s view:
Sterling v Dollar and Euro long-term
WEEKLY DOLLAR / STERLING CHART
In the long-term Cable chart the pressure on Sterling arises from repeated failure at a clear band of resistance
1.6802- 1.7020 throughout 2009.
But there is no completed Top yet in place (that requires a breakdown through 1.5709).
So the market is not immediately in the grip of a medium-term force. (The modest support from the rising diagonal is being tested right now and may provide further clues.)
WEEKLY EURO/STERLING CHART
In the Euro/Sterling, the long-term chart shows the weakness of Sterling from mid 2009 to have arisen from the formation of a continuation pattern a bull falling wedge which completed in September this year.
(Of course, wedges are not the strongest of indicators.)
It would be much clearer for the Sterling bears if the possible Neckline above the market at 0.9380 were to be breached....completing a bull H&S pattern
Sterling v Dollar and Euro long-term
DAILY DOLLAR/STERLING CHART
Short-term, in Cable a small Head and Shoulders Reversal looks to have completed - though we need a confirming close beneath the neckline at 1.6294 today.
The minimum target of that pattern is more or less the critical Pivot at the Prior Low at 1.5709....
DAILY EURO/STERLING CHART
Short-term, against the Euro, the picture is strangely congruent with the long-term chart.
The market is again in the grip of a bull wedge (created, note well, by the solid support from the Prior High at 0.8838).
The Fibonacci 50% resistance may be proving troublesome, in any event, there is no very short-term pattern driving the market
Mark Sturdy
John Lewis
Seven Days Ahead
For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com
Thursday, 10 December 2009
EUR/USD Bears Emerging From the Woods?
The FX Trader’s view - The 2009 uptrend in EUR/USD has struggled recently, coinciding with the test of a 76.4% recovery level. There seems to be something in the wind, but the bears need to produce more before we can confidently call for a pullback phase.
- WEEKLY CHART: So far the 76.4% recovery level has provided good resistance, and s/term reaction here has been negative. Support from around the old Dec-08 high has come under pressure.
- DAILY CHART: Breach of a s/term bull channel base provided a preliminary bear sign. And now we wish to see a close below the 1.4623 03-Nov low for a better signal – this would also see violation of the bigger bull channel base. But the 23.6% level at 1.4510 would warn against chasing the market down from these lower levels. However, at that stage we would be assuming that s/term strength was temporary ahead of further bear action.
[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]
Rough Rice Reaches Key Resistance
The Commodity Specialist view - In respect of the current climate conference we take a look at Rough Rice futures (CBOT), with prices influenced by inclement weather – the possible result of climate change. This was recently discussed on CNBC by Mark Sturdy, and those interested may follow this at http://www.cnbc.com/id/15840232?video=1349059964&play=1
- WEEKLY CHART – CONTINUATION: 2009 has been dominated by a recovery in prices. The latest upleg, which broke free of consolidation below 14.00 (now a support area) has reached a zone of key resistance. This includes the old 15.830 Aug-08 low and 16.350 38.2% retracement – a struggle to get through here would not surprise, with a s/term pullback becoming more likely. A later return to strength is expected.
- DAILY CHART – MAR-10: The structure of the last upleg from 13.500 Sep low looks mature, increasing pullback risk – this is emphasised by the current negative RSI divergence. First area of support comes from the dual Fibo retracements, but the stronger area is slightly lower, prior 14.690/14.625/ 14.500 consolidation highs combining with the 61.8% and 38.2% pullback levels to offer potentially strong support. Buyers on dips would favour this area. Note that this key support area falls around 14.00 on the continuation chart.
[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]
Friday, 4 December 2009
Ftse resilient but there may be trouble ahead
The whole Dubai affair proved no more than a storm in a teacup, so is the rally set to continue?
The Technical Trader's view:
MONTHLY CHART
The market's bounce from the lows has been brisk.
Driven latterly by the H&S Reversal.
And the 50% retracement resistance has been smashed....
But note there's the Prior Low at 5301 to overcome. The first solid resistance from old price action that the market has had to deal with. We are testing that level right now.
And, not far above, the impetus from the H&S pattern will peter out as the minimum target is reached.
The market is driving into a band of growing resistance.
DAILY DEC 09 CHART
As the market has approached the long run resistance at 5301, hesitation has been clear.
The bounce back from the recent sell-off has been spirited but notable for the falling volume.
We are genuinely impressed but cautious.
In the short term we need a clear and sustained breakthrough 5386 to get long again
The Macro Trader's view:
The rally in the FTSE that begun back in March of this year, suffered an unexpected setback last week when over two days the market dropped in excess of 250 points in reaction to an announcement by Dubai World that they sought to reschedule US$60.0B of debt due to mature during December.
At first, traders feared the announcement would lead to a debt default dragging the Dubai authorities down with it and through contagion, affect other economies just when global recovery seemed assured.
The main lenders to Dubai world were banks and among those UK banks have a reasonably large exposure. Traders worried that this potential new source of bad debt, would affect lending to other business entities and derail the recovery or worse still force a major bank into bankruptcy.
Fears were somewhat assuaged over the weekend when Abu Dhabi appeared to offer support to the state of the UAE and traders anxiously awaited the start of the new trading week to see how the Dubai authorities would handle the crisis.
In the event, they effectively washed their hands of the whole affair and for a brief period the worst case scenario looked set to unfold, but it didn't. The UAE Central Bank offered emergency liquidity, Dubai World announced it sought only to renegotiate its debt not renege on it, and the financial world breathed a sigh of relief.
The whole affair had proved no more than a storm in a tea cup and even if default had occurred, there is already substantial government support in place internationally for the banking industry, which would have prevented any major bank from going under.
Now equity markets and the FTSE in particular are back focused squarely on the economic outlook for the major economies. While the route back to a strong self-sustaining recovery is still fraught with risks, data continues to indicate that recovery remains on track. Indeed, in the US the Fed's Beige Book released yesterday evening said 8/12 Federal reserve districts showed further modest improvement. Moreover, policymakers have again begun to talk of the need for policy to be pre-emptive.
So last week's sell-off in the FTSE was a correction in what is shaping up to be a solid bull market. It was a correction that was probably due and any one of a number of negative news stories could have brought it on. It just happened to be Dubai grating on nerves still raw after the worst financial crisis in living memory. The market looks set to advance further.
Mark Sturdy,John Lewis
Seven Days Ahead
For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com
The Technical Trader's view:
MONTHLY CHART
The market's bounce from the lows has been brisk.
Driven latterly by the H&S Reversal.
And the 50% retracement resistance has been smashed....
But note there's the Prior Low at 5301 to overcome. The first solid resistance from old price action that the market has had to deal with. We are testing that level right now.
And, not far above, the impetus from the H&S pattern will peter out as the minimum target is reached.
The market is driving into a band of growing resistance.
DAILY DEC 09 CHART
As the market has approached the long run resistance at 5301, hesitation has been clear.
The bounce back from the recent sell-off has been spirited but notable for the falling volume.
We are genuinely impressed but cautious.
In the short term we need a clear and sustained breakthrough 5386 to get long again
The Macro Trader's view:
The rally in the FTSE that begun back in March of this year, suffered an unexpected setback last week when over two days the market dropped in excess of 250 points in reaction to an announcement by Dubai World that they sought to reschedule US$60.0B of debt due to mature during December.
At first, traders feared the announcement would lead to a debt default dragging the Dubai authorities down with it and through contagion, affect other economies just when global recovery seemed assured.
The main lenders to Dubai world were banks and among those UK banks have a reasonably large exposure. Traders worried that this potential new source of bad debt, would affect lending to other business entities and derail the recovery or worse still force a major bank into bankruptcy.
Fears were somewhat assuaged over the weekend when Abu Dhabi appeared to offer support to the state of the UAE and traders anxiously awaited the start of the new trading week to see how the Dubai authorities would handle the crisis.
In the event, they effectively washed their hands of the whole affair and for a brief period the worst case scenario looked set to unfold, but it didn't. The UAE Central Bank offered emergency liquidity, Dubai World announced it sought only to renegotiate its debt not renege on it, and the financial world breathed a sigh of relief.
The whole affair had proved no more than a storm in a tea cup and even if default had occurred, there is already substantial government support in place internationally for the banking industry, which would have prevented any major bank from going under.
Now equity markets and the FTSE in particular are back focused squarely on the economic outlook for the major economies. While the route back to a strong self-sustaining recovery is still fraught with risks, data continues to indicate that recovery remains on track. Indeed, in the US the Fed's Beige Book released yesterday evening said 8/12 Federal reserve districts showed further modest improvement. Moreover, policymakers have again begun to talk of the need for policy to be pre-emptive.
So last week's sell-off in the FTSE was a correction in what is shaping up to be a solid bull market. It was a correction that was probably due and any one of a number of negative news stories could have brought it on. It just happened to be Dubai grating on nerves still raw after the worst financial crisis in living memory. The market looks set to advance further.
Mark Sturdy,John Lewis
Seven Days Ahead
For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com
Thursday, 3 December 2009
Bear Clouds in EUR/JPY Begin to Precipitate
The FX Trader’s view - For the last few months the EUR/JPY cross rate has been range-trading, unable to push above key overhead resistance. Just recently there was a clear break of a key support area, tipping the scales in the shorter term bears’ favour.
- MONTHLY CHART: This year’s recovery failed just ahead of the old highs from 2003/2004 and the 141.00 50% retracement level. Repeated failure to break through this has recently led to an initial bear signal on the Daily chart.
- DAILY CHART: Last week there was finally a clear bear break below key support around the 129.75/130.00 area. This initially opened the way for a test towards the 50% pullback level –but the strength should be there to push lower in due course. Note the lower 1.618 swing projection (from the Oct 129.01-138.51 upleg) around 123.14, for example. Overhead, the 50% bounce level at 132.70 offers possible resistance to a s/term rally – it doesn’t matter that the former key support level has been surpassed by the s/term bounce; the damage has already been done.
- Any sellers into that 50% level would likely have initial stops just above the 135.71 04-Nov high, as a recovery through here would certainly negate the bear analysis.
[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]
Cocoa – Bull Pride Before a Fall?
The Commodity Specialist view - The recovery in Cocoa from its Oct-08 low has been impressive. Interrupted by a period of volatility earlier in the year it has more recently returned to the Jul-08 peak, but displaying short term indecision now.
- MONTHLY CHART – CONTINUATION: In 2008 the sharp drop found good support from near old highs of 2003-2005, with a long term 76.4% retracement level just below. The 3385 peak has been retested, but it is currently unclear if bulls have the will yet to break decisively through.
- DAILY CHART – MAR-10: A preliminary indication that bulls were tiring was the Nov closes below the channel base. This suggested any subsequent rally was more likely to precede another bear leg. In the Commodity Specialist Guide we have been noting the 3360 76.4% bounce level as possible resistance and this has now been tested – we wait to see if bears can re-assert themselves from around here. In any case, the official bear trigger won’t be given unless we see a close below the 3077 12-Oct correction low, which would also violate the 23.6% level of the whole recovery from Nov-08. Next target would then be the 2880/57 area, 38.2% and Feb-09 high.
- In the Guide we had suggested aggressive sellers might favour the 3350 area for entry, stops at 3450. Now achieved, partial profits are targeted around 3100, with stops then reducing to cost. This strategy does, though, pre-empt the required confirming bear break.
[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]
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