The Dollar out-muscles the Euro but both are in trouble

We judge the Dollar remains vulnerable against all the other majors with the exception of the Euro. But if the current small improvement in the data accelerated, the Fed might need to review its QE2 policy, only then would we see a stronger Dollar across the board. And on balance the charts remain sceptical of such a change.

The Technical Trader’s view:

MONTHLY CHART

The Dollar’s strength has been clear against the embattled Euro since the beginning of November.

The pull-back through the triple support of

(1) the rising diagonal from June 2010 and

(2) the horizontal support from the Prior High at 1.3334 and

(3) the Fibonacci retracement support

is not yet quite certain on the weekly chart.

But look closer…

DAILY CHART

The pull back certainly paused at the 1.3334 level.

But that pause has created an additional continuation pattern - a Bear rising wedge – which has completed.

In short, the bear Euro, bull Dollar trend is intact and looks like continuing.

But the Dollar Euro is misleading: both look vulnerable against other currencies. Take the Dollar Swiss: first the long-term context

MONTHLY CHART

The breakdown of the Dollar against the Swiss has been a long time in the making.

But the push beneath the Prior Pivotal Low at 1.1193, in conjunction with the completion of a continuation Triangle sets up the Dollar bears nicely.

And not surprisingly the Euro is under even worse pressure against the Swiss:

MONTHLY CHART

This is clearly a more advanced bear scenario.

The breakdown through the Prior Lows, and the emergence of a possible Bear continuation Triangle (albeit not completed) far beneath the 1.4399-1.4317 band.

The Dollar may be outperforming the Euro, but they are both in trouble elsewhere.

The Macro Trader’s view:

The Dollar currently presents an interesting case because of the following macroeconomic scenario:

- The Fed remains committed to QE2 since it still judges the economy is not growing fast enough to generate sufficient new jobs,

- Inflation remains low and the Fed is concerned it could go lower,

- Obama has performed a Tax cut U turn which has now won Senate approval, and

- Data is mixed.

Does this argue for Dollar strength or weakness? Currently we are seeing both strength and weakness depending on which major currency one measures the Dollar against.

The Dollar/Euro rate is testimony to Dollar strength. The Euro remains under pressure as the Euro zone Sovereign Debt crisis remains unresolved. Ireland has voted in favour of the EU/IMF rescue deal, but questions remain unanswered about other troubled Euro zone economies.

The rating agency Moody’s has placed Spain on negative watch, as it judges a bail out is unlikely; the Spanish economy is too big for the others to support, and in any event the German Government seems to have little stomach for funding any more costly rescues, which has led German opposition MP’s to claim Merkel is not pro-European.

This lack of agreement between Euro zone member governments serves to further undermine the Euro and highlight the enormity of the task in front of them, since the most obvious answer; issuing Euro Zone debt in place of individual Sovereign Euro denominated debt has been ruled out by the Germans.

But against the Swiss Franc the Dollar looks less sure-footed. The trend has been Dollar bearish over a long period and while traders may prefer the Dollar to the Euro, the Swiss Franc has the edge over the Dollar. When Bernanke announced QE2 there was criticism from several quarters, but most accepted the Fed had to act. The US economic recovery had slowed to a crawl, unemployment wasn’t coming down, and already weak inflation was edging uncomfortably close to deflation.

However, last week Obama suddenly changed policy and agreed to support an extension of soon-to-expire Bush tax cuts. His change of stance is purely political; he wanted a 2nd stimulus, but Congress refused and in a couple of weeks a republican controlled House will make it even less likely he would be able to win support for increased spending, so he has taken the only option available; supporting the renewal of the tax cuts. Although not his preferred route, it still pumps money into the economy and is a de facto second stimulus.

Traders are mainly unhappy with what they see as a further substantial erosion of fiscal health as the measure will add at least US$1.0T to the national debt in less than two years. The US debt to GDP ratio was already on course to hit 100% in a few short years, cutting tax without addressing the deficit is Dollar negative.

But before rushing out to sell the Dollar, activity data has started to turn a little stronger. Although the most recent non-farm payroll report was weak, both recent ISM surveys were stronger. More recently the trade deficit sharply narrowed and retail sales beat consensus. And only yesterday industrial production reported a stronger than expected increase. So suddenly data has started to turn Dollar positive. The FOMC met earlier this week and some analysts wondered if they would alter their QE2 policy in the light of the Obama U turn, but they didn’t.

We judge the Dollar remains vulnerable against all the other majors with the exception of the Euro. But if the current small improvement in the data accelerated, the Fed might need to review its QE2 policy, only then would we see a stronger Dollar across the board.

Mark Sturdy

John Lewis

Seven Days Ahead

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Signs of Weakness Start to Appear in GBP/USD

The FX Specialist view - From this year’s May low a good recovery in GBP/USD has been seen, but bull fatigue is starting to show and the latest slip back is retesting first key support. A break of this would temporarily sideline the bulls.

• WEEKLY CHART The bounce off the 76.4% pullback has so far failed just ahead of the 76.4% recovery level. A further setback looks quite likely before any further attempt on this resistance.
• DAILY CHART: In the FX Specialist Guide we have been looking at the bull channel base projection which helps to gauge market momentum. It has begun to fail as support, putting bulls on a cautious footing. After a s/term bounce (resisted around the 50% rebound level, not shown) the slightly lower 38.2% pullback has come under scrutiny again – this is viewed as the key level, with break below to herald a deeper correction phase. This then initially open up the 1.5294/65 area, 07-Sep low and 50% pullback, where next s/term support seems likely. Overhead resistance is offered by the early Aug high around 1.6000, ahead of the 1.6094 19-Nov high.

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Is Silver’s Uptrend Looking Tired?

The Commodity Specialist view - The long term picture in Silver still looks very bullish, but shorter term the chart structure could be changing, with certain signs of bull fatigue starting to appear. At this stage these still need confirmation though.

• MONTHLY CONTINUATION CHART: Following the break of the 21.185 2008 high we turned attention to a Fibo projection near 29.00, which was easily reached. The chart remains in a strong position for now.
• DAILY CHART - MAR-11: A new 2010 high was seen last week, but note the negative RSI divergence at the time –are bulls tiring? First confirmation of fatigue would come from a drop through the small channel base projection at 26.50 currently, with a further sign of weakness to come from a break of recent support near the 25.00 level. In the Commodity Specialist Guide we had already been waiting to see if the chart structure was changing, heralding a longer-lasting pullback/consolidation phase. We await developments.

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Short Term USD/JPY Bulls Look Well-Placed

The FX Specialist view - The downtrend in USD/JPY from the May high came close to the major 1995 low in early Nov, where support has emerged. After rebounding shorter term bull signs have been seen, and we expect further gains to be made before any resumption of the long term bear trend.

• MONTHLY CHART In the FX Specialist Guide we continue to note the positive RSI divergence, which questions the longer term bears’ resolve. See how the major 1995 low just under 80.00 was neared, with support beginning to emerge.
• WEEKLY CHART The downtrend has so far fallen short of the projected bear channel base, our next support on this chart. First resistance here comes from the late 2009 84.81 low – see also Daily chart, though.
• DAILY CHART: The breach of the bear channel top and 23.6% level favours shorter term bulls now, with any dips viewed as temporary. Potential supports here include the 82.00 area and the lower 81.20 76.4% pullback. At this stage the next upside focus is on the 85.86/93 area, 38.2% recovery and 16-Sep high. However, the more key, pivotal resistance area is 87.60/88.00, 50% recovery and old key support.

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Bonds: Is the top in place?

The long Bull Run in bonds that tracked the financial crisis/recession increasingly looks over. Earlier this year when growth started to return to the developed economies, Government Bond markets remained well supported, but not now. Why is that?

The Technical Trader’s view:

WEEKLY CHART

The US Treasuries has fallen hard from close to their Pivotal Prior Highs at 128-22, through the first supports of significance at 121-21.5 and 122-14.5.

This is a significant breakdown, and should not be underestimated.

But the lack of a compelling Reversal pattern or Top formation robs the bears of short-term momentum.

WEEKLY CHART

So too, has there been a vicious pull-back in the Bunds from the massive resistance of a cluster of Fibonacci levels.

But note that in this case the market’s steep decline has yet to break the vital band of support 124.60-126.53.

The diagonal from 2008 is an added bear factor, but that band needs to be broken for the bears to really triumph.

Nor indeed, like the TNote, is there a top formation in place yet in either the medium or short-term…

These bond markets have come far and fast, the source of the next bear impetus is as yet unclear.

The Macro Trader’s view:

The long bull run in bonds that tracked the financial crisis/recession increasingly looks over. Earlier this year, when growth started to return to the developed economies, Government bond markets remained well-supported. Not now.

When the Euro zone sovereign debt crisis broke in the spring, bonds rallied anew as traders rushed into US Treasuries, UK Gilts and Euro bunds; traditional safe-haven trades. But now they are all under pressure despite the Euro zone debt crisis gripping markets again, forcing Ireland to seek an EU/IMF/EZ/UK rescue, and other peripheral Euro zone Countries seeing their bond yields hit new highs.

Basically traders fear the fiscal stance of many Euro zone Countries are unsustainable. They are also becoming anxious about Germany’s ability to underwrite too many more rescues. In fact, the German Government is anxious too. Chancellor Merkel does not want to increase the rescue fund. The Chancellor would also like more of the burden of future rescues to fall on private investors in Eurozone government bonds; this too has unsettled bond markets with the once safe Bund looking vulnerable to further selling.

Then there is the US fiscal position. President Obama has run up enormous debts, but unlike most Euro zone Countries that have implemented austerity budgets, he believes the US can go on writing IOU’s forever.

In the UK the Government has implemented drastic spending cuts, and so far the economy is holding up well. Some think once the cuts bite growth will slow, others think the Bank of England should be hiking rates to control inflation which has remained persistently above target for an extended period. The Gilt draws no benefit from the spending cuts and also looks vulnerable to further selling.

But recent bearish price action has its roots in the US. Politicians have been arguing about whether or not the Bush era tax cuts that are about to expire, should be renewed/extended to help support the economy. President Obama had opposed this. He argued they were too focused on the middle classes and did little to help the poor.

But suddenly he changed his mind this week and agreed to extend them, subject to votes in both houses of Congress. However there are some powerful critics of this U turn on both sides of the political divide.

The Bond markets took fright. If agreed, these tax cuts would add about US$1.0T to the national debt in just 2 years and keep the budget deficit to GDP ratio at around 10%. This is clearly unsustainable and Moody’s has again questioned the US’s ability to hold onto her AAA credit rating in such an environment.

Traders fear such a move, which together with the Feds current QE2 policy would prove inflationary as it amounts to a 2nd fiscal stimulus the US can hardly afford.

We judge the environment is turning increasingly bearish for Bonds and a vote in Congress in favour of extending the tax cuts without off setting spending cuts, would likely provide the short-term trigger the Bears seek.

Mark Sturdy

John Lewis

Seven Days Ahead

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Gold Bulls Showing Uncertainty

The Commodity Specialist view - The overall chart structure in Gold has remained firm, with consolidation at the higher levels occurring. However, we stay on the alert for early signs of bull fatigue with overhead resistance not far away.

• GOLD - WEEKLY CONTINUATION CHART: The break from the former wedge pattern saw the market come close to the projected bull channel top (1465 now). This offers current resistance. Supports come from the former wedge top around 1300, then the 1264.80 Jun high.
• GOLD - DAILY CHART FEB-11: This week’s brief new all-time high ended in a negative Key Reversal Day. Not that significant in itself, but further weakness that sees the 1331.10 16-Nov low breached would sideline the bulls and strongly suggest that a more prolonged correction phase was underway. Below the old wedge top support around 1300 the key, pivotal level is considered to be the 1271.00 21-Jun high (also a key reversal day). Failure here would have negative implications for the medium term.

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Recovery in USD/CHF at Key Resistance

The FX Specialist view - After reaching a high for the year in May USD/CHF slipped steadily back, piercing the major 2008 low in Oct. Subsequent recovery has been relatively modest so far, and key resistance is currently holding the bulls back.

• WEEKLY CHART The drop back in 2010 eroded the major 0.9674 2008 but found support around the bear channel base we had drawn in. The top of the first resistance area on this chart comes from the rising old support/return line at 1.0065 currently – it is so far working.
• DAILY CHART: The recovery has put pressure on the 23.6% retracement at 1.0000 – a clear break of this and the resistance line from the Weekly chart would be an initial bull signal. Attention would then turn to the 1.0328 level, 06-Aug low (and base of Jul/Aug congestion) and 38.2%. S/term we wait to see if dips prove temporary. Ideally weakness should hold above the s/term rising support line at 0.9655 if a resumption of the bear trend is to be avoided.

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Stocks back from the brink

The change of sentiment at the ECB has allowed ECB President Trichet the freedom to warn the markets that the ECB could start buying Bonds in size and the mere prospect has lowered Bond yields of Portugal and Spain and seen stocks rally hard as traders judge the crisis might just be brought under control. Whether or not the Euro zone debt crisis is over is too soon to say, but equity markets are breathing a huge sigh of relief.

The Macro Trader’s view:

As the Irish economy came close to meltdown and the World held its breath to see if the Euro zone would put together a timely rescue big enough to satisfy markets, equity markets sold off. Indeed, even after the rescue deal was announced markets remained nervous.

The fear was that Ireland was just another domino in a line ready to fall with traders switching their attention from one weak peripheral economy to another. The first to require a rescue was of course Greece and although Ireland adopted a severe austerity program earlier in the year, it wasn’t enough.

The Irish Banking system was in deep trouble and Ireland simply didn’t have the resources to rescue its own banks. But traders were not convinced the crisis was over and they turned their attention to Portugal and Spain.

Both countries saw their bond yields soar to record levels, prompting Portuguese authorities to warn about the real threat now facing their banks. Spain was also forced to deny she needed financial assistance, which was echoed by the EU authorities.

But still traders were not convinced and for a while stocks and bonds sold off in tandem. If Portugal ultimately required a rescue, that would be manageable. But if Spain too needed a rescue that was something completely different. Spain is the Eurozones fourth largest economy and where would the burden fall? With Germany of course. And even Germany cannot absorb these de facto transfers of debts endlessly.

But at last the ECB woke up to reality. There may not be a central Bond issuing authority in the Euro zone, but there is a Central Bank and it can pump liquidity into the system in any size it chooses. Which is what has been happening, and in addition, it can purchase any quantity of Euro zone originating debt in any size it chooses.

Until recently some on the ECB’s governing council have been against this, most notably the German representative Prof Weber of the Bundesbank. But now he too has realized the real dangers facing the Euro, the Euro zone and the EU itself.

The change of sentiment at the ECB has allowed ECB President Trichet the freedom to warn the markets that the ECB could start buying Bonds in size and the mere prospect has lowered Bond yields of Portugal and Spain and seen stocks rally hard as traders judge the crisis might just be brought under control.

Whether or not the Euro zone debt crisis is over is too soon to say, but equity markets are breathing a huge sigh of relief.

Mark Sturdy

John Lewis

Seven Days Ahead

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Crude Oil Bulls Remain Confident

The Commodity Specialist view - Earlier this year the slip back in Crude Oil price was supported by the 38.2% retracement, with bears unable to make further headway. The subsequent recovery still looks sound, with the May high remaining under threat of being breached.

• BRENT CRUDE - WEEKLY CONTINUATION CHART: Recovery from the 38.2% pullback earlier pushed beyond the prior highs shown. These have so far provided support. The May high remains under threat, with a break higher to turn attention towards the 61.8% recovery level around 105.00.
• BRENT CRUDE - DAILY CHART JAN-11: A recent dip held above the 81.24 19-Oct low, helping to preserve current bull momentum. The chart looks well-placed to make a better break of the 76.4% level to challenge the 93.24 May high. Beyond here we can start calculating higher projection levels.

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The dogged Dax

The Dax has been outperforming the other Western markets in a striking way over the last few months. Its reaction to the recent wobble arising from Euroland and Korea further has underlined the differences still further...

The Technical Trader’s view:

WEEKLY CHART

The succession of Prior Highs under the market underpins the Germans in a way that no other major Western market can compare with.

Note too that the drive up through the Prior Highs coincides with the break of the 61.8% retracement of the whole bear move from the Highs of 2007 (8005) and the lows of 2009 (588.50).

Look closer.

DAILY CHART

Close inspection of the Dec contract reveals a continuation Triangle – which has completed and whose minimum move is up as far as 7150 or so.

The market has a good deal further to go before losing momentum.

DAILY CHART

The move up from the completion of the continuation Triangle is well structured – the Prior Highs of 6561.50 and 6684 are acting as good support.

High volume down-days have been matched by high volume up-days.

The market is well set

Mark Sturdy

John Lewis

Seven Days Ahead

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Bear Wind in EUR/CHF Blows Weaker

The FX Specialist view - We last looked at EUR/CHF when bears seemed fully in control, but subsequent action has suggested that that tide is on the wane, with the first positive indication recently seen. The current pullback could prove temporary, with a fresh attempt on the upside to come.

• WEEKLY CHART Recovery prompted by the long term bear channel base exceeded the 23.6% retracement (of the downmove from Dec-08 1.5881 high), but so far has shied away from higher 1.3955 38.2% level. The recent key reversal week marked the start of a period of correction, but this resumed temporary (see below).
• DAILY CHART: The earlier breach of the bear channel top projection suggested that bears’ momentum had weakened, with the current correction phase viewed as temporary. We currently focus on the 1.3070/1.3015 area, early Jun low and 76.4% pullback, where support looks likely. However, a recovery through the 1.3834 01-Nov high is needed to give bulls further confidence. At this stage any speculative buyers near the 1.3070/15 support would need initial stops below the 1.2763 08-Sep low.

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Sugar Setback Finds Temporary Support

The Commodity Specialist view - This year’s recovery in Sugar has been dramatic, recently exceeding the early 2010 high. However, the ensuing sharp correction has sidelined bulls for now, with the risk of further weakness to come.

• SUGAR – WEEKLY CONTINUATION CHART: The sharp sell-off a couple of weeks ago in fact produced a Key Reversal Week which, although large in magnitude (which can sometimes see bears expend much of their energy), increases the risk of further negative action. Note first support on this chart comes from the Sep-09 24.85 high.
• SUGAR - DAILY CHART MAR-11: On the front month chart the market slipped back following test of our latest Fibo projection, the 2.618 swing off prior Jan/May downmove. The 38.2% pullback has provided near term support, aided by the 25.35 28-Sep high. More interesting support, though, is the lower 21.75/56 area, 61.8% and early Jan high. This latter should provide stronger support. Our current thinking is that s/term rallies should prove temporary at present.

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Bunds retracing: no reversal yet

In recent weeks, Ireland has again become the cause of concern as her Banks desperately need restructuring. Unfortunately, Ireland doesn't have the necessary resources to recapitalise her Banks. Fearing a collapse of the Irish Banking system, economy and ultimately sovereign default, the yields of Euro bonds issued by Ireland have soared to record highs. This has also affected Portugal and Greece with Spain also finding herself in the firing line. This time though, instead of the Bund futures contract rallying as they did during the Grrek crisis , they have sold off, why?

The Technical Trader’s view:

MONTHLY CHART

The market has pulled back from the band of Fibonacci resistance beginning at 132.

The first support from the parallel channel at 130 odd was breached –

but we have closed on the second (weaker) support the diagonal from the Prior Highs about 127.65.

Powerful support only kicks in at the Horizontal 126.53.

And even then it is the top of a band of support really – 124.60-126.53.

Look closer.

WEEKLY CHART

The pull-back from the Fib cluster is clear.

Note that there is no clear Top formation in place yet.

And note too, the near coincidence of the steep rising diagonal (from 2008) and the horizontal 128.53/2.

So far it is a pull-back not a convincing reversal.

But a pull-back that may go further. Again, look closer

DAILY CHART

The pull-back has smashed down through the support from 128.29 – and note well that that breakdown smashed the weak pivotal support from the two Prior Lows.

Expect that area 128.00-29 to be good resistance on any pull-back.

First medium-term support of consequence is 126.53.

There is no short-term support.

The Macro Trader’s view:

Is the Long Bull market in the Bund over?

Since June 2008 government bond markets have rallied driven by two major dynamics:

- The financial crisis which powerfully argued for lower bond yields as deflation and slump were feared,

- As a safe haven for traders seeking sanctuary from various scares which on numerous occasions have given rise to risk aversion, especially the Euro zone Sovereign debt crisis earlier this year.

The first time the Euro zone Sovereign debt crisis centred on Greece erupted Government Bond markets rallied hard including the Bund. Although the crisis was termed the Euro zone Sovereign debt crisis, it was really focused on several peripheral Euro zone members, which apart from Greece, included Ireland, Portugal, Spain and others.

Ireland acted quickly, initiating a severe austerity budget in the hope of convincing the markets the authorities were in control of the situation and could manage it themselves without recourse to external help, unlike Greece who needed an EU/IMF bailout.

During this period peripheral Euro zone bond yields soared, as traders bought Bunds as a hedge against the risk that the Euro zone could fragment, with the weak periphery forced to leave the Euro. The rationale was the core rump would be fiscally strong centred on the German economy that was starting to enjoy a strong recovery and this explains why the Bund rallied so hard during that period.

Several months on we know Greece was “rescued” and an emergency bailout fund was established in case any other Euro zone economy fell prey to similar difficulties. For a while the crisis seemed, if not actually resolved, at least under control.

However, while the German economy continued to enjoy strong growth, others in the Euro zone didn’t. In fact Greek GDP slowed, making the deficit reduction targets agreed earlier seem harder to achieve.

But in recent weeks, Ireland has again become the cause of concern as her Banks desperately need restructuring. Unfortunately Ireland doesn’t have the necessary resources to recapitalise her Banks. Fearing a collapse of the Irish Banking system, economy and ultimately Sovereign default, the yields of Euro bonds issued by Ireland have soared to record highs.

This has also affected Portugal and Greece with Spain also finding herself in the firing line.

This time though, instead of the Bund futures contract rallying, they have sold off, why?

When the crisis first hit earlier this year, there was a delay in providing the help Greece needed because Germany wanted tough conditions attached. The German Government needed to convince its public that the rescue was in German national interest, and to achieve this she needed to make any future rescue seem like a last resort that would entail penalties including the rescued Country loosing of a degree of fiscal and economic sovereignty.

These conditions were eventually dropped, but Germany has since been pressing for them to be formally adopted in a treaty change together with private Bond investors being obliged to contribute to any future sovereign rescue.

Clearly Bond investors are literally scared by the implications of being required to bailout an economy purely for investing in apparently safe government, low yielding Bonds, and have been liquidating positions as a result.

But there are other factors in play too: negativity towards the Fed’s QE2 policy and bearish sentiment in Japan towards JGBs. That is based on the Japanese Government seeming to have precluded its self from further unilateral currency intervention in the weeks leading up to the recent failed G20 meeting when Japan’s government criticised South Korea foe currency manipulation.

So can the Bund rally if the crisis is resolved?

That depends heavily on the terms of any deal agreed with Ireland and whether or not the other peripheral economies continue to remain under attack.

Mark Sturdy

John Lewis

Seven Days Ahead

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Soybean Bulls Retreating After Surge

The Commodity Specialist view - This year’s recovery in Soybeans finally managed to exceed the 2009 high, but has found resistance from a Fibonacci level not much above. The chart is now in pullback mode, turning focus on likely supports.

• SOYBEANS – WEEKLY CONTINUATION CHART: The 1291.25 Jun-09 high was eroded, but slightly higher 61.8% recovery level has proved to be an effective barrier so far, prompting a slip back. On the continuation chart note potential support offered by the 1078.50 Dec-09 high.
• SOYBEANS - DAILY CHART JAN-11: The bull run finally came to a halt near the higher of our two Fibo projections at 1340, with 12-Nov producing a Key Reversal Day. This ties in with the 61.8% level on the Weekly chart and a pullback phase is not surprising now. The 38.2% pullback level at 1176 now offers first support, often an effective level s/term, with the 1153.25 27-Sep high support not far beneath. However, a potentially much stronger area lies at 1170/1160, 61.8% and the Dec-09 high (not much below the 1078.50 on the Weekly chart). We would look for a decent rebound around here, if tested.

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EUR/USD Bounce Closing in on Stronger Resistance

The FX Specialist view - The recovery in EUR/USD from the Jun low has, so far, been a 3-wave affair and recently found good resistance. There is now the risk that further weakness will mean curtains for the bulls as upward momentum seeps away.

• WEEKLY CHART So far a 3-wave, corrective structure has developed from the Jun low: - it has failed just ahead of 76.4% resistance, raising questions as to whether the bull move has run its course (note how a former 76.4% level was effective in late 2009).
• DAILY CHART: After the market failed ahead of the 76.4% retracement level (no requirement for this to be tested) the continued drop below the 20-Oct 1.3696 low has provided a modest sign of momentum loss. However, more important are the current bull channel base (now under pressure) and then the 1.3333 06-Aug high, just above which resides a 38.2% pullback level – violating these supports would have more certain bearish implications. Subsequent rally attempts should then prove temporary ahead of further bear activity.

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76.4% Support in GBP/JPY Still Turning Bears Away

The FX Specialist view - From a rally high in 2009 the GBP/JPY cross has continued to experience downward pressure through 2010. However, a 76.4% pullback level has, on three occasions now, been eroded but with bears then losing interest...

• WEEKLY CHART See how the downmove in 2010 has continued to fail to hold below the 76.4% level when tested/eroded. We here show the 23.6% recovery level of the 2009/2010 decline, around 135.00. A break through this would provide the first bull sign. Now see Daily chart...
• DAILY CHART: Recent weakness failed to hold below the prior 126.73 May low, with that long term 76.4% level also having a residual supporting influence. Focus has again turned on the bear channel tops near 133.00 currently, now tested. However, more key is the 135.00 area, where the 17-Sep high coincides with the 23.6% recovery level to provide dual resistance – a break above this would provide an initial bull signal here.

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Natural Gas Finds Support, But What Recovery?

The Commodity Specialist view - This year there have been two legs in the downtrend in Natural Gas, and finally interesting dual support has been reached. This has prompted a s/term recovery, but further signals are required in order to inspire bulls.

• NATURAL GAS – WEEKLY CONTINUATION CHART: A typical 3-wave downmove has been seen so far this year. Note how dual support has been tested (3.155 May-09 low and 76.4% pullback), perhaps not surprisingly triggering a rebound phase.
• NATURAL GAS - DAILY CHART DEC-10: Recent support came, not surprisingly, from around the bear channel base, close to support from the Weekly chart. Initial resistance is from the Sep congestion below 4.500, which includes a 38.2% rebound level. However, more important is the (redrawn) bear channel top at 4.650 – a break through this would imply that overall downward momentum had slackened, with a better recovery underway, s/term dips notwithstanding.

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Bunds - Are the bulls finished

Over recent weeks German economic data has strengthened, and traders are in no doubt about the role the strong German economy is playing in pulling along the weaker Euro zone and its long peripheral tail. Indeed some traders are becoming anxious about the ECB's intentions with the focus shifting towards when the ECB will begin to tighten policy. While we think that day is still a little distant, the Bund is on the verge of a correction and perhaps a bear market.

The Technical Trader’s view:

WEEKLY CHART

The market has drifted back – through the upper diagonal of the bull channel certainly, but only slightly, with good support beneath the market at 127.60 (diagonal) the horizontals at 126.53 and then 124.60.

DAILY CHART

This is a chart revealing weakness but not bearishness: certainly the small Double Top formed on the break down through the 130.63 Low gave some impetus to the bears,

and the push beneath the Prior Low Pivot at 129.08 may serve to ratchet the market further down,

but the support at 128.29 is substantial,

and so too is the support from the Prior High at 126.53 from March 2009.

The trouble for the bears is that there is no medium-term Top formation in place or in prospect.

Bulls will note this, and the supports beneath the market as well and thus they will remain poised for a bull signal – a bull wedge continuation pattern?

Or a rather shorter term structure that is yet to develop.

In short, we are not bears yet….

DAILY CHART

On the other hand, traders will also notice this chart in the Bobls – German 5yr bonds a little way along the yield curve.

That is a clear Double Top, whose completion coincided with the break of the (admittedly weak) rising diagonal support.

Note the respectably high volume and open interest on the last two days.

Might this not fuel more fresh selling?

This is the medium-term Top that the Bund market lacks – and apart from the obvious tilting of the yield curve implied, it suggests the Bund will remain under pressure in the near term

The Macro Trader’s view:

During the Euro zone sovereign debt crisis the Bund was a strong safe-haven trade. This may seem paradoxical given the nature of the crisis: investors were worried about the solvency of several Euro zone governments, but sought shelter from government default in the Euro Bund.

Why was that?

The Euro Bund is based on the German Bund contract and as the sovereign debt crisis deepened, yield spreads between affected government bonds and German Bunds widened out appreciably. But as the crisis eased the Bund started to lose its safe haven appeal.

At first Bears found stiff resistance from the Bulls as German economic data went through a soft patch, indeed for several weeks it began to look as though the German recovery was going the same way as in the US.

However, over recent weeks German economic data has strengthened, and traders are in no doubt about the role the strong German economy is playing in pulling along the weaker Euro zone and its long peripheral tail.

Now the Bears look on the verge of asserting themselves. Unlike the Fed and possibly the Bank of England, the ECB has never felt the need to flirt with ideas of QE2. Indeed traders are becoming anxious about the ECB’s intentions with the focus shifting towards when the ECB will begin to tighten policy.

While we think that day is still a little distant, the Bund is on the verge of at best a serious correction and perhaps a bear market. One only needs to look at the German Bobl to see where some traders’ current thinking lies.

Ah, you might say, but what about the strength of the Euro, won’t that cool the German economy and give the Bund a fresh lease of life?

While it is always possible a new round of risk aversion could emerge and send government bonds higher, we do not think the Euro will be the undoing of the German economy. Interest rates in Europe are very low: 1.0%. For an economy like Germany’s that is enjoying a strong recovery, interest rates are over-expansionary. Indeed, if the Bundesbank was still in control of German monetary policy we judge rates would already be moving higher.

So given the expansionary impact of Euro zone interest rates we think the German economy will weather the strength of the Euro well. But as the recovery proceeds it will probably be Bond yields that rise and we think we may now be at that point in the Bund.

In the Bobl that milestone has already been passed.

Mark Sturdy

John Lewis

Seven Days Ahead

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EUR/GBP Recovery Repelled by Key Resistance

The FX Specialist view - Following the earlier fall in the EUR/GBP cross a recovery phase has been in process since the June low. However, this has now seen a test of a key resistance area, with the market accordingly pulling back.

• MONTLHY CHART: Prior breaks of support signalled a medium term bear move underway, with a 50% pullback level providing effective support. The current rally is presumed temporary – note resistance here from the old triangle underside has now been tested – so far, s/term reaction here has been negative.
• DAILY CHART: The continuing bull run has now tested the 76.4% recovery which is providing s/term resistance. This ties in with resistance from the weekly chart, so a pullback is not a surprise at this stage. Note support offered by the 0.8532 Jul high, while longer term bears will be looking for a continuation lower and through the more key support area of 0.8400, prior s/term high and bull channel base projection. Violating this latter would imply bulls had lost their momentum.

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Copper Could Pullback Soon

The Commodity Specialist view - Following a 38.2% pullback in Copper earlier this year subsequent recovery breached important resistance which opens the way for a return to the old 2008 peak. Shorter term, though, the signs are building that a correction is due.

• COPPER – WEEKLY CONTINUATION CHART: After the former 38.2% pullback level provided strong support the recovery finally breached former 76.4% resistance. S/term dips are expected to be temporary. Should weakness unfold now note the current 23.6% retracement lies at 3.2500 (not shown).
• COPPER - DAILY CHART DEC-10: S/term resistance has come from near a bull channel top, but a pullback phase will not look likely until price falls through the channel base, around 3.6000 currently. In fact, note that the daily RSI signals s/term bear fatigue via a negative divergence, putting us on the alert for such a correction. Beyond immediate support from the Apr 3.6690 high, and then lower 3.4305 early Aug high, we would focus on the 3.2000 25-Aug low for support, the starting point for the current upleg, and near to the 23.6% level on the Weekly chart.

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FTSE set to go higher

Now that the Public spending review is out of the way, the market has had a hump in the road removed. It can focus on the Bank of England's likely policy response and an economic recovery that will ultimately be built on sound private sector growth in the future rather than the sands of public spending largess.

The Technical Trader’s view:

MONTHLY CHART

The tantalizing possibility that technicians are studying –is the completion of a massive bull Head and Shoulders Reversal pattern.

That requires a second close above the Neckline at 5649 this Friday.

It looks good.

DAILY CHART

The more detailed chart shows how the market has paused beneath the April High of the market and yet has been supported by the Neckline from the weekly chart.

WEEKLY CHART

Earlier today the possibility of a completed continuation Flag was very real – but the market drifted back within the congestion area.

Yet that is still a possibility so watch for a close above the higher falling diagonal currently at 5742.

The Macro Trader’s view:

Global equity markets have been bullish in recent weeks supported by expectations that the Fed will restart its QE program and buy more US Treasuries. The Bank of Japan too, recently cut rates to zero and announced a Bond purchase program which is seen as a prelude to full blown QE.

In the US, deflation is feared but not yet a fact, whereas in Japan it has dogged the economy for years. In the UK CPI has been above target for months, yet the Bank of England appears to be moving towards a new tranche of QE.

We think the FTSE has benefitted over recent weeks from bullish overseas sentiment driven by those factors detailed above. What makes this market look all the more impressive is that for several months the UK Government’s Spending review had been hanging over it like the sword of Damocles. The spending review is now known. The MPC minutes released yesterday morning showed policy makers still edging closer to restarting QE in the UK. Why though, if CPI is so far above target?

The simple answer is that the government has cut public spending by £82.0B. This will see around 500,000 public sector jobs lost with perhaps a similar amount in the private sector, as a result CPI should correct to a level below target allowing the Bank to plug the gap created in the economy with a fresh round of QE.

So rather than fret about the risk of an economic slowdown in the UK due to the spending cuts, investors are looking to the positives and these are:

· High probability the Bank of England will restart QE,

· Interest rates look set to remain unchanged throughout 2011,

· The economy should rebalance away from the public sector towards the private sector,

· The UK economy should benefit not just from easier UK policy, but also from QE2 in the US, and

· The threat to the UK’s AAA rating should now be removed.

In short, now that the Public spending review is out of the way, the market has had a hump in the road removed and can focus on the Bank of England’s likely policy response and an economic recovery that ultimately should be built on sounder private sector growth rather than public spending largess.

Mark Sturdy

John Lewis

Seven Days Ahead

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US Dollar Index Continues To Sag

The FX Specialist view - The recovery in the US Dollar Index earlier in 2010 has largely been undone, although technically it is still unclear if the 2008 low is going to give way. There are various supports before then that need to be breached.

• MONTHLY CHART The earlier breach of the former bear channel top in 2008 suggested a loss of long term bear momentum. Subsequent action may yet prove consolidative ahead of another bull attempt, but we must await clarity for now. Note the previous 76.4% support which could again have an influence.
• WEEKLY CHART This year’s pullback recently violated a 76.4% retracement, testing the rising support line, where s/term support has emerged. Beyond here is the 74.170 Nov-09 low ahead of slightly lower channel base projection at 73.50 currently, which stand in the way of a return to the 70.700 Mar-08 low.
• DAILY CHART: The second bear leg in the move starting in Jun has found s/term support from the bear channel base projection (75.60 currently). Lower down note an equality target at 74.936, Jun/Aug downmove extended off Aug high, which may also prove supportive. However, little in the chart structure suggests that bears are about to tire. First resistance of note remains from the 06-Aug 80.085 low, with falling resistance not much above. A recovery through this latter would be the first sign that downward momentum had diminished.

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Pause in Silver’s Bull Run Should Be Temporary

The Commodity Specialist view - Following a consolidation over the summer months a fresh, unbroken bull move in Silver has seen the major 2008 peak overcome and the first of our Fibo projections reached. There is room for a s/term pullback now, but there’s no sign that the main uptrend is tiring.

• SILVER – MONTHLY CONTINUATION CHART: Recovery from near major support has now exceeded the 2008 peak, testing our initial projection. We have also marked in an equality target, the 2001/2008 upmove extended off 8.78 2008 low, around 2600. Support on this chart comes from the prior 21.185 high, ahead of the 19.80 May high.
• SILVER - DAILY CHART DEC-10: The unbroken bull run reached our next Fibo projection at 25.00, where s/term resistance has appeared. We have marked in two nearby retracement levels, 23.6% & 38.2% - ideally the second one will hold in order to preserve maximum momentum. However, key support doesn’t come in until around the 19.915 May high, where the current bull channel base projection resides. It is more important for this latter to hold now.

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AUD/USD Bulls Push Market to New Heights

The FX Specialist view - Following a May low at a Fibonacci support AUD/USD has shown steady recovery that has now seen a breach of the major 2008 peak. The charts are strong and require calculation of higher targets now.

• MONTLHY CHART: See how 76.4% provided clear support in late 2008. The recovery is now complete, with the 2008 peak exceeded.
• WEEKLY CHART: Here note how the 38.2% pullback provided strong support, sidelining lingering bears as the market refused to weaken again. Breaking the 0.9405 Nov-09 high was a bull sign, with recent breach of the 2008 peak providing further confirmation. The current bull channel top projection implies resistance around 1.0750 and serves as the next target.

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Crude Oil Bulls Beginning to Stir

The Commodity Specialist view - Earlier this year a key reversal month in Brent Crude gave hope to medium term bears, but after initial weakness the subsequent lack of follow-through has now given way to a bout of s/term strength that suggests bears had their chance and bulls are regaining confidence.

• BRENT CRUDE - WEEKLY CONTINUATION CHART: The 38.2% pullback provided good support and the subsequent consolidation was initially thought to be the precursor to further weakness. However, recent gains have exceeded certain resistance (e.g. prior highs on this chart) which implies bear momentum has dried up. This provides an early green light to bulls now.
• BRENT CRUDE - DAILY CHART DEC-10: On this chart the breach of falling resistance followed by the 84.09 04-Aug high were s/term bull signs. The current danger is a slip back and close below the 77.09 23-Sep low, which would negate the break and resurrect bear risk once more. Meanwhile, beyond possible 76.4% resistance at 88.20 there is not much in the way of a return to the early May high.

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Gold is still good

Gold can rally further though markets seldom rally in straight lines. The main reason for Gold's underlying strength is the weakness of the Dollar. Why does that matter?

The Technical Trader’s view

WEEKLY CHART

The market surpassed the minimum target for the large Head and Shoulders pattern established throughout 2008 and 2009, and doesn’t look like stopping anytime soon.

The minimum target for the small continuation Triangle that has formed above that H&S pattern is higher still around 1470 or so.

DAILY CHART

The drive up hard from the completion of the Triangle has been impressive.

The first pause at the Fibonacci cluster of resistance 1369-79 was swiftly reversed and the 1351 High overcome.

But that cluster may yet cause problems….a clear break above would be very encouraging… and for those already low stops beneath 1351 look sensible

The Macro Trader’s view:

Readers of our market updates will be well aware of our long term bullishness for this market. Indeed In the Macro Traders Guide we have been recommending a long position. But this market has rallied hard over recent days making new all time highs. Can Gold continue to rally and what drives it?

In a nutshell yes, it can rally further though markets seldom rally in straight lines.

The main reason for Gold’s underlying strength is the weakness of the Dollar. Why does that matter?

The US is still the world’s largest economy and the Dollar its sole reserve currency. That means that export led economies such as China, Japan and the Middle East oil exporters to name but a few have massive foreign exchange reserves and they are overwhelmingly denominated in US Dollar assets, so they are anxious that the Dollar remains reasonably stable.

But because the US economic recovery remains locked in a fragile recovery, the Dollar is burdened by very low interest rates. Moreover the Fed is concerned that the outlook for US inflation is probably lower than that level it considers to be consistent with a growth rate that both contains inflation but creates sufficient new jobs.

Their response to this increasingly looks like a resumption of QE dubbed by market analysts as “QE2”.

This involves the Fed printing money, or to give it its polite term; creating new Central Bank reserves, but they are in effect printing money. This is a perfectly reasonable policy response in the current environment:

· Low inflation,

· Weak growth,

· Weak Labour market,

· Weak housing market, (home foreclosures in the US hit 100,000 in September for the first time ever).

And is designed to inflate the money supply, raise asset prices and create ‘a little’ inflation. It also has the effect of devaluing the value of the Dollar against foreign currencies.

This is a subtle response to Japan’s attempt to weaken the Yen through foreign exchange market intervention and it also acts against Chinese recalcitrance over allowing their own currency to revalue. While the Rinimbi is pegged to the Dollar, a weaker Dollar drags the Chinese unit with it, but it devalues China’s massive foreign currency holdings which are in excess of US$2.0T.

One way or another, if the Fed restarts QE, the Dollar will weaken and there is little the export driven economies can do to prevent it, so in this environment which increasingly resembles competitive devaluation, Gold looks set to continue its long Bull trend until the market feels the US economy has stabilized sufficiently to allow the Fed to ease off the monetary policy throttle and actually consider a tighter policy stance; that day is a long way off.

Mark Sturdy

John Lewis

Seven Days Ahead

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EUR/USD Bounce Closing in on Stronger Resistance

The FX Specialist view - The recovery in EUR/USD from a Jun low has turned out impressive, with a second bull leg now well underway. This has started to reach certain interesting resistance levels which the market could find tough to overcome.

• WEEKLY CHART Currently a 3-wave, corrective structure is unfolding in the recovery. On this chart note the current 76.4% 1.4373 level as potential resistance, and note how a former 76.4% level was effective in late 2009.
• DAILY CHART: Recovery through the 1.3333 06-Aug high has now breached the bull channel top projection to test our next technical level at 1.4040, an equality target that extends the Jun/Aug upleg off 24-Aug low. Temporary resistance would not surprise here, but the s/term chart structure remains very positive. Possible stronger resistance is offered by the higher 1.4373 76.4% retracement level. Currently we view the recovery as temporary, within the context of a longer term bear trend. First notable support comes from the 1.3333 06-Aug high but, at this stage, it wouldn’t be until the 1.3000 area was broken that bull momentum could finally be said to have dried up.

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No reversal yet in Gold

Is this the end of the rally, the end of the trend or just yet another round of profit-taking?

The Technical Trader’s view:

WEEKLY CHART

The medium-term in the Gold market looks very attractive.

The initial catalyst for the bulls was surely the Head and Shoulders continuation pattern that drove the market today to its minimum target of 1350 or so.

But the creation of a Continuation Triangle has given the market a additional catalyst to drive it better. The minimum move implied by that pattern is 1475.

Look closer.

DAILY Dec 10 CHART

The Triangle has been a powerful bull stimulus.

And the upper diagonal will act as good support on any pull-backs.

Today the market seems to have baulked at the resistance of the band of Fibonacci extensions 1370-1380 and may indeed come back to the 1290 level to test that support.

Certainly the good volumes and rising open interest do not suggest a trend reversal yet….despite the violence of today’s trading.

The Macro Trader’s view:

The latest leg of the long Bull run in gold began back at the end of August, when the market made a succession of new all time highs, but today the market spiked higher and then sharply reversed.

Is this the end of the rally, the end of the trend or just yet another round of profit taking?

First, we need to understand what drives this market. Over the last several years Gold has rallied mainly during periods of Dollar weakness and or geopolitical tension. Most recently the main dynamic has been Dollar weakness.

But Gold is also supported by economic uncertainty and the policy mix that is generating. It is well understood that the Dollar is weak because of the fragile nature of the US recovery, but there are also serious concerns about the strength of recovery in the Euro zone, Japan and now the UK too.

The response from policy makers has been a little different in each case:

1. In the US the administration continues to preside over a very large budget deficit and debt build up with the Fed contemplating a new round of QE,

2. In the Euro zone, fiscal austerity has been the masterplan after the Sovereign debt crisis earlier this year almost broke the Euro, with the ECB supplying sufficient liquidity rather than QE,

3. In Japan the economy remains in the grip of deflation, the authorities are now intervening to weaken the Yen and the BOJ has cut rates to zero and announced a Bond purchase program,

4. In the UK the recently-elected government has put together a severe fiscal consolidation that may cause several quarters of slow growth and perhaps tip the economy back into recession. The response of the Bank of England has been to contemplate a restart of QE.

So in three of the larger economies the Central Bank is either reactivating or close to reactivating QE. The Gold market currently has little to fear from QE regarding inflation, globally it is tame, although less so in the UK.

But what un-nerves investors and attracts them to Gold is the nature of the current economic climate and the policy responses it requires. Quite literally no one really knows how all this will end since other post WW11 recessions have been completely different.

While the likes of Fed chairman Bernanke has studied the great depression at great length no two economic periods are the same. The world is a very different place to the 1930’s with many previously economically primitive countries now economic powerhouses that are challenging the older developed economies for dominance.

This is why we judge Gold is currently so attractive to investors and indeed Central Banks. Since the current environment looks like persisting at least into much of next year, gold looks set to make yet more all time highs, so for us, we are now likely witnessing a correction which should ultimately provide fresh buying opportunities.

Mark Sturdy

John Lewis

Seven Days Ahead

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Wheat Retreat Not Yet Complete

The Commodity Specialist view - Following an earlier surge in Wheat prices a normal correction from an early Aug high developed. After a pause this has got going again, and we look for likely lower supports now.

• WEEKLY CONTINUATION CHART: After the earlier strong surge a corrective phase still looks to be in process. This leaves higher targets such as prior 952.75/ 961.75 highs and the 987.00 61.8% recovery level out of reach for now. Meanwhile the former Nov-09 583.50 high offers next interesting support for a further setback.
• DAILY CHART – DEC-10: Another bear leg has emerged after recent consolidation, putting pressure on the 660.00 Nov-09 high area so far. However, focus is also on lower retracements, particularly 76.4% at 566. This exactly coincides with an equality target (Aug downleg extended off 757.00 Sep high). Note that this lies quite close to the Nov-09 high from the Weekly chart. This therefore offers an interesting support/target area. Overall, weakness continues to be regarded as a temporary affair.

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Wheat Retreat Not Yet Complete

The Commodity Specialist view - Following an earlier surge in Wheat prices a normal correction from an early Aug high developed. After a pause this has got going again, and we look for likely lower supports now.

• WEEKLY CONTINUATION CHART: After the earlier strong surge a corrective phase still looks to be in process. This leaves higher targets such as prior 952.75/ 961.75 highs and the 987.00 61.8% recovery level out of reach for now. Meanwhile the former Nov-09 583.50 high offers next interesting support for a further setback.
• DAILY CHART – DEC-10: Another bear leg has emerged after recent consolidation, putting pressure on the 660.00 Nov-09 high area so far. However, focus is also on lower retracements, particularly 76.4% at 566. This exactly coincides with an equality target (Aug downleg extended off 757.00 Sep high). Note that this lies quite close to the Nov-09 high from the Weekly chart. This therefore offers an interesting support/target area. Overall, weakness continues to be regarded as a temporary affair.

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Gold Bulls Coming Back For More

The Commodity Specialist view - Following earlier 2010 gains in Gold, the pullback in June has proved a short-lived affair, with a fresh upleg from late July having now led to new 2010, and all-time, highs. A current chart pattern calls for a degree of caution, but we must still consider higher targets.

• WEEKLY CONTINUATION CHART: The structure of the whole recovery from 2008 low may still be seen as a type of 5-wave/ impulsive structure, but more important right now is the current wedge-type pattern. These can be reversal formations, but sometimes are the precursor to acceleration higher, in which case note the next Fibo projection on this chart, at 1375. Only a reversal through the pattern base and then Jul low (see Daily chart) would provide a clear bear sign.
• DAILY CHART DEC-10: We also show the wedge pattern here, with initial upside break from this. We now look to higher levels such as a Fibo projection at 1340, which lies just below a bull channel top projection currently. First support comes from the 1270.60 Jun high, although most important at this stage is the wedge base around 1200.

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Impending spending cuts and VAT increases scheduled for the start of 2011 may at best depress growth for a couple of quarters and at worst risk a double dip recession. Despite this the FTSE is only around 200 points off its 2010 highs. Why is that?

The Technical Trader’s view:

WEEKLY CHART

The market has been driven up from the lows by a completed Head and Shoulders Reversal pattern.

The minimum target move ( to 5644) was achieved - and then the market fell back.

But only to find support at the 38.2% retracement around 4900.

Look closer at the bounce from that level.

But note too, the importance of the current market level – it is a potential additional Neckline of a bull Head and Shoulders pattern. If overcome (the neckline level is 5662) the market will receive a large additional stimulus…

DAILY CHART

The day chart is interesting.

Note the tight consolidation of the past few weeks.

And the support from the rising diagonal from Prior Highs.

Attempts by the bears to break that diagonal support have –so far- repeatedly failed.

It’s tempting to look for a structure within the congestion – but there isn’t one.

Yet, on balance, we favour a test of the possible Neckline and the Prior High at 5720.

We are short-term bulls. And if 5720 can be taken out, another medium-term bull leg is in prospect.

The Macro Trader’s view:

Impending spending cuts and VAT increases scheduled for the start of 2011 may at best depress growth for a couple of quarters and at worst risk a double dip recession. Despite this the FTSE is only around 200 points off its 2010 highs.

Not a bad recovery from the lows hit in early July when the market gave up almost 1000 points on a range of anxieties.

The main factors weighing on the market then were:

- The weakening US economic recovery, and

- The Euro zone Sovereign debt crisis.

In truth, neither has been dealt with.

The US economy continues to show signs of weakening causing policy makers and administration officials alike to lose sleep. They ponder how best to re-invigorate the economy.

As for the Euro zone debt crisis, all seemed calm during the summer. But now there are renewed fears about Ireland as the Anglo Irish Bank is in need of rescue. The sum involved is put at one year of Ireland’s tax revenue - an expensive bail out. But the cost of failure would be much greater.

So why then are stocks looking so bullish and in particular the FTSE?

As ever, markets and economies are closely linked. In the US the Fed has let it be known that it stands ready to buy Treasuries if the recovery weakens any further in QE2.

In the UK, the Bank of England’s recent MPC minutes have alluded to a similar course. Policy makers are moving towards a position where they might need to re-activate their own QE program as they now judge downside risks to growth greater than upside risks to inflation due to the impending fiscal tightening.

While one could easily take the view that the economies of the US and UK are in bad shape if both Central Banks need to restart the printing presses, the equity markets take the news positively, since a fresh injection of Central Bank reserves should help spur economic growth.

Moreover there is always the possibility that here in the UK the Bank might opt to skip buying gilts and buy corporate bonds instead, in an effort to get the cash out to main street, thereby by passing the Banks that politicians still accuse of hording cash.

In any event, it is the promise that the US and UK could reactivate their QE programs that is largely behind the current bullishness of stocks including the FTSE.

Mark Sturdy

John Lewis

Seven Days Ahead

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EUR/CHF Recovery Just Temporary So Far

The FX Specialist view - Bears in EUR/CHF have remained in overall control this year, with one notable rally attempt made in Jul. Another halt in downtrend has now been seen so it is worth looking at what more needs to be done to suggest a better recovery phase was underway.

• WEEKLY CHART The long term bear channel base has again tried to support the fall in values here. At this stage we have marked in the current 23.6% recovery at 1.3500 (of the downmove from Dec-08 1.5881 high). A break/close through this would be a positive sign, but also see Daily chart.
• DAILY CHART: In the Commodity Specialist Guide we have been looking at a s/term Fibo projection, which recently impeded bear progress and prompted a bounce. At this stage the first interesting resistance comes from a bear channel top projection, around 1.3685 currently. A break through this would imply serious loss in downward momentum. Subsequent pullbacks would then more likely be temporary. Meanwhile bears must continue to be given due respect.

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Are Bunds recovering?

A change in sentiment could drive the Bund much higher, at as far as the highs of August, as traders are now thinking the rest of 2010 is going to be something of a struggle for German and Euro zone growth. Moreover this might re-awaken sovereign debt fears that seemed to have been put to rest over the summer months, since weaker GDP will make the austerity measures adopted by many Euro zone countries seem even more unpopular.

The Technical Trader’s view:

MONTHLY CONT. CHART

The Bund’s long-term chart is fascinating.

The breakout of a long-term parallel channel was reversed, but there appears to be good support from the top of the parallel channel and the price congestion that formed the continuation Triangle that drove the market further on up.

Look closer.

DAILY CHART

Looking specifically at the December contract we can see the very short-term rationale for the bounce in the monthly chart- a completed bull falling wedge.

Note too, the 50% retracement support

and the proximity of the 2.5% yield support at 130.37.

Wedges are not the most reliable of the signals, and there is still telling resistance above the market, for example, the band of Fibonacci and prior Low resistance at 131.82.

So we are not yet entirely convinced of the short-term bull case. But the seeds of a turn are in place.

The Macro Trader’s view:

The story of the Bund throughout much of September was one of decline as traders first took profits and then went short. The Bund had enjoyed a long rally as traders fretted over the global economy and more specifically the US economic recovery, but sentiment changed early in September. Why was that?

There are several reasons:

1. German economic data had been very strong, suggesting the Euro zone as a whole would be dragged better by the German locomotive,

2. Fed Chairman Bernanke in a speech let it be known that the Fed could do more to help the US economy if the US recovery weakened further, and

3. The US non-farm payroll report released at the beginning of September, was better than expected, turning sentiment even more positive.

The impact on the markets was clear:risk aversion subsided, allowing stocks to rally throughout much of the month, drawing traders away from bonds and back into equities, as safe haven trades lost their allure.

So why now are stocks under pressure and Bonds, including the Bund beginning to rally?

Again there are several reasons, but mainly:

1. Euro zone data has turned weaker over recent weeks, with today today’s Euro zone PMI composite survey coming in weaker than expected, led mainly by weaker data from Germany, and

2. The recent FOMC policy statement which again saw the Fed pledge to ease further if the economic recovery weakened further, weighed on stocks this time.

So crucially the Euro zone economy that was fuelling the Euro zone recovery; Germany has cooled off, and the very promises from Bernanke that earlier in the month helped fuel the rally in stocks, has caused traders to rethink.

Instead of taking the promise of additional easing by the Fed as a positive for the economy, they are instead thinking the economy is in bad shape for the Fed to even consider a new round of QE. The result is clear: risk aversion is again rearing its head and the safe haven status of Bonds is once again being sought.

This change in sentiment could drive the Bund much higher, at as far as the highs of August, as traders are now thinking the rest of 2010 is going to be something of a struggle for German and Euro zone growth.

Moreover this might re-awaken sovereign debt fears that seemed to have been put to rest over the summer months, since weaker GDP will make the austerity measures adopted by many Euro zone countries seem even more unpopular.

Mark Sturdy

John Lewis

Seven Days Ahead

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