We are currently in the middle of the US Q4 earnings reporting season, which hasn't gone too badly. But equities are not moving higher, instead they are suffering a correction lower. Why?
The Technical Trader's view:
WEEKLY CHART
The sell-off has been brisk with a sharp increase in volatility.
But in the context of the bull run from the beginning of 2009 it has yet to be extensive.
Nor is there any reversal pattern in place.
In addition, we can see that the minimum move implied by the clear Head and Shoulder Reversal pattern lies far above the market. It is at the top of the band of horizontal resistance from the two prior Lows in 2008.
Which is a powerful coincidence.
We remain bulls.
DAILY CHART
The technicals did not especially anticipate the sell-off (there was for example no completed Top formation) but they did suggest vulnerability.
It was apparent from the price action that 1128 was important support.
First because the market bounced of it successively and second because that level was a major Fibonacci resistance from the whole bear move 2007 - 08.
The subsequent bear move has broken through a series supports from Prior highs.
Use the range 1073-1093 as wide support. Note that volumes have been dropping on the sell-off suggesting a diminution of bear energy. Only a break of 1073 might send them higher again. Yet even then, because there is no reversal pattern in place we would remain medium-term bulls.
The Macro Trader’s view:
We are currently in the middle of the US Q4 earnings reporting season, which hasn’t gone too badly, but equities are not moving higher, as would be expected, instead they are suffering a correction lower. Why?
One could argue that data has turned a little mixed, and it has. Recent retail sales reports have disappointed and the housing market correction seems to have stalled, just as the government support program for 1st time buyers has expired.
But other data has remained reasonably robust:
· Recent ISM manufacturing and non-manufacturing surveys look strong,
· Capacity utilization has picked up,
· Consumer confidence has recently firmed,
· Non-farm payroll, while still reporting net job losses, reports a much lower rate of job destruction, and
· Today’s Durable goods report wasn’t as weak as the headline number suggests when you look at the Ex-transport report which came in better than expected.
So on balance you could argue there is currently more going right in the US economy than wrong. Add in yesterday’s FOMC policy decision in which policy makers repeated their pledge to keep rates at exceptionally low levels for an extended period and the environment for stocks is quite benign.
Or would be, but for political threats to the market.
US President Obama has already surprised the markets, especially equity traders, by announcing a levy on US Banks, as a means of compensating US Tax payers for rescuing them. This was a surprise. When the financial assistance was originally offered to the Banks it was widely understood that the US Government was only looking for eventual repayment. But it seems the banks have recovered sooner than expected and are in the process of repaying the financial assistance.
Not only that, but business was good last year and big bonuses are back. This has angered the US public, and a President looking weak in the polls has decided to go for popular measures, rather than economically sound policy.
So he surprised the markets for a second time last week by announcing plans to introduce legislation echoing the 1930’s Glass-Steagall Act. This split Banks into commercial and investment. Obama wants to stop banks owning or investing in Hedge Funds, Private Equity funds and from operating their own Proprietary trading desks.
The income Banks receive from Prop trading is typically 5 - 10% of total revenues, but that isn't what has upset equity markets, especially the S&P. The markets have been upset by the air of hostility to Wall Street and they don't know where it will end. Thus the S&P has driven lower over the last several days.
How much further the move can go is unclear. Last night's FOMC policy statement and State of the Union address may have stopped the rot. News that Ford has made a whole year profit for the 1st time since 2005 also helped.
But unless and until Obama explains exactly what he intends to do and re-assures markets that he isn't anti business or anti Wall Street, this market could remain fragile.
Mark Sturdy
John Lewis
Seven Days Ahead
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Friday, 29 January 2010
Friday, 22 January 2010
EUR/USD Bears Get Bit Between Their Teeth
The FX Trader’s view - We alerted readers to the bearish possibilities in EUR/USD in our 10th December Update, when further confirmation was still needed. There have since been some encouraging developments, and the current chart structure implies there is more to aim for on the downside.
- WEEKLY CHART: Excellent resistance was seen at the 76.4% recovery level, when the whole upmove from the Mar-09 low was showing signs of maturity. The structure of the fall suggests that bears’ energy is far from spent – any s/term rallies should prove temporary. We have re-calculated our pullback levels, taking the Oct-08 low as the starting point – will 38.2% provide s/term support? – Probably.
- DAILY CHART: The break below an earlier bull channel base plus 1.4623 03-Nov low gave a bearish signal, confirmed by violation of the 23.6% pullback level. The recent Dec-Jan bounce was meager, finding resistance ahead of that 1.4623 low (and close to the 38.2% bounce level at the time). Any rebound from around the 38.2% pullback area should be short-lived, dying out ahead of the 1.4582 13-Jan high. Whilst the lower pullback levels should be kept in mind (see Weekly chart) we draw attention here to the 1.3737 Mar-09 high which previously provided good support in Jun-09, but more importantly to the 1.3672/54 area, an equality target (1.5144-1.4216 decline extended off 1.4582 high) and Fibo projection. We are minded to give these more emphasis than the pullback levels. A better rebound from near here would be sought.
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Silver Bears Look Well-Placed
The Commodity Specialist view - The impressive 2009 recovery in Silver began to show signs of maturing in the latter part of the year, with price action in Dec giving a hint of bear fatigue. We remain content with the bearish stance that we hold in the Commodity Specialist Guide and now expect to see further confirmation of this.
- WEEKLY CHART – CONTINUATION: The 76.4% recovery level wasn’t very effective as resistance – it is arguable whether or not it has had a residual resistive influence. What is clear, though, is the resistance found from the Jul-08 high. First interesting support on this chart is implied around 16.00 (see also Daily chart below).
- DAILY CHART – MAR-10: An initial negative sign came from the Dec break below the small bull channel base projection, implying loss of momentum. The recent bounce off clear 38.2% support has met equally clear resistance from the 76.4% s/term recovery level – we had assumed that such strength would not be long-lasting. A break below the 38.2% area is likely, the next target being the 16.00 area, 50% pullback and Jun-09 high. However, we also keep in mind a lower Fibo projection at 15.55. We are not yet looking for a major reversal in bull trend, though.
[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]
Gilts rebound
Over the last two weeks the Gilt (with other bond markets) has managed a steady recovery away from the lows. Retracement or reversal?
The Macro Trader's view
We started the New Year bearish of bonds as we judged the global economic recovery looked on track and although a slow recovery was still expected, traders seemed confident enough to turn their attention to the debt build up in the major developed economies.
This had the effect of hitting many major sovereign bond markets hard in the early days of January. Of course, the bear move had begun over the Christmas and New Year Holiday period, but it wasn't until the New trading year had began that we judged the move was more than Year End activity.
Yet over the last two weeks the Gilt (with other bond markets) has managed a steady recovery away from the lows. At first we thought this was a reflex move caused by the pause in the equity market rally, but sentiment in bonds has clearly changed and the reasons are international rather than purely domestic.
This week UK CPI came in worse than expected, but the Bank of England has largely forecast this and they expect a reasonably rapid correction back below their target. And today the UK government borrowing data was a little bit better than expected, albeit still on track for the worst debt build up ever in peace time. That explains this week's price action from a domestic stand point.
But what of the international dimension I mentioned?
The US President has over the last two weeks turned hawkish towards the US Banks. Previously traders were under the impression that those Banks that received money from the US authorities to save them from collapse, only needed to repay those funds to be free from the governments grip. Obama now intends raising a levy or tax on US Banks as a means of compensating the US taxpayer. Additionally, he is looking at introducing legislation to limit proprietary trading activities of the Banking industry in an effort to reduce risk. This has had a negative impact on bank shares and weakened stocks.
Also there has been weaker-than-expected US data over recent weeks with some patchy profit reports from leading US Banks and corporations.
Then there is China. The Chinese Central Bank has already announced it is tightening Bank's reserve requirements in an attempt to cool lending and stop the economy from overheating. This too weighed heavily on stocks as it was seen as a prelude to higher interest rates. Additionally, China announced today Q4 GDP growth of 10.7%. This too hit stocks hard and further supported bonds as traders' fears about higher interest rates intensified.
Why, you might ask, does it matter to western stock and bond markets what the Chinese authorities do? Simply, China has or is close to over taking Japan as the World's second largest economy and it has been the engine of growth pulling the rest of the World out of recession. So while China has enjoyed strong growth, the major developed economies are only crawling their way better. If China acts to cool its economy, it will cool the global recovery too.
So the dynamic of the markets has changed. Traders have stopped worrying about debt, they see no threat from inflation short/medium term in the developed economies and are again worrying about growth.
Result: stocks weaker, bonds (including the Gilt ) stronger on safe-haven buying. Where does the Gilt go from here? Watch the data, not just UK, but globally - for a clearer picture.
The Technical Trader's view:
WEEKLY CONTINUATION CHART
The market has bounced off the Pivotal low of 114.26.
But the retracement has yet to meet the resistance from the Neckline above the market at 115.94 or thereabouts.
Only a break of that would really upset the bears
DAILY CHART
This is sobering for the bears.
The bear rising wedge has yet to complete (that would require a breakdown through the lower diagonal).
But it remains intact.
On the other hand, for the bulls, there is no clear bottom formation in the making yet.
So, despite the penetration of the diagonal from the Prior Lows, we remain biased to the bear tack, but waiting for a short-term selling signal.
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 Macro Trader's view
We started the New Year bearish of bonds as we judged the global economic recovery looked on track and although a slow recovery was still expected, traders seemed confident enough to turn their attention to the debt build up in the major developed economies.
This had the effect of hitting many major sovereign bond markets hard in the early days of January. Of course, the bear move had begun over the Christmas and New Year Holiday period, but it wasn't until the New trading year had began that we judged the move was more than Year End activity.
Yet over the last two weeks the Gilt (with other bond markets) has managed a steady recovery away from the lows. At first we thought this was a reflex move caused by the pause in the equity market rally, but sentiment in bonds has clearly changed and the reasons are international rather than purely domestic.
This week UK CPI came in worse than expected, but the Bank of England has largely forecast this and they expect a reasonably rapid correction back below their target. And today the UK government borrowing data was a little bit better than expected, albeit still on track for the worst debt build up ever in peace time. That explains this week's price action from a domestic stand point.
But what of the international dimension I mentioned?
The US President has over the last two weeks turned hawkish towards the US Banks. Previously traders were under the impression that those Banks that received money from the US authorities to save them from collapse, only needed to repay those funds to be free from the governments grip. Obama now intends raising a levy or tax on US Banks as a means of compensating the US taxpayer. Additionally, he is looking at introducing legislation to limit proprietary trading activities of the Banking industry in an effort to reduce risk. This has had a negative impact on bank shares and weakened stocks.
Also there has been weaker-than-expected US data over recent weeks with some patchy profit reports from leading US Banks and corporations.
Then there is China. The Chinese Central Bank has already announced it is tightening Bank's reserve requirements in an attempt to cool lending and stop the economy from overheating. This too weighed heavily on stocks as it was seen as a prelude to higher interest rates. Additionally, China announced today Q4 GDP growth of 10.7%. This too hit stocks hard and further supported bonds as traders' fears about higher interest rates intensified.
Why, you might ask, does it matter to western stock and bond markets what the Chinese authorities do? Simply, China has or is close to over taking Japan as the World's second largest economy and it has been the engine of growth pulling the rest of the World out of recession. So while China has enjoyed strong growth, the major developed economies are only crawling their way better. If China acts to cool its economy, it will cool the global recovery too.
So the dynamic of the markets has changed. Traders have stopped worrying about debt, they see no threat from inflation short/medium term in the developed economies and are again worrying about growth.
Result: stocks weaker, bonds (including the Gilt ) stronger on safe-haven buying. Where does the Gilt go from here? Watch the data, not just UK, but globally - for a clearer picture.
The Technical Trader's view:
WEEKLY CONTINUATION CHART
The market has bounced off the Pivotal low of 114.26.
But the retracement has yet to meet the resistance from the Neckline above the market at 115.94 or thereabouts.
Only a break of that would really upset the bears
DAILY CHART
This is sobering for the bears.
The bear rising wedge has yet to complete (that would require a breakdown through the lower diagonal).
But it remains intact.
On the other hand, for the bulls, there is no clear bottom formation in the making yet.
So, despite the penetration of the diagonal from the Prior Lows, we remain biased to the bear tack, but waiting for a short-term selling signal.
Mark Sturdy John Lewis
Seven Days Ahead
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Friday, 15 January 2010
USD/JPY Bulls Pause for Thought
The FX Trader’s view - The downmove in 2009 culminated in an acceleration in November, below prior 87.11 Dec-08/Jan-09 lows, which seemed to justify a bearish stance. However, an equally rapid recovery led us to think that we might have seen a blow-off move, and subsequent action supports this view – s/term weakness may not, therefore, be long-lasting.
- MONTHLY CHART: In the FX Specialist Guide we have started to look at a positive divergence on the monthly RSI indicator now visible – the implication is that long term bear enthusiasm is on the wane.
- WEEKLY CHART: The break below the 87.11 lows was deceptive – but such false breaks can be turned to advantage. Note that key long term falling resistance is currently around 93.80, and a decent Weekly close above this would provide a further bull signal.
- DAILY CHART: The break above the 90.76 04-Dec high and bear channel top projection supported our thinking that bears had enjoyed a blow-off finale in Nov. S/term resistance around the 50% recovery level has been seen, but we view s/term weakness as probably temporary ahead of another bull attempt. First support from that 90.76 high has come under pressure today – below this note in particular the 88.23/87.96 support area, 61.8% pullback and Oct low. It is unclear if losses can extend to the lower 86.92 76.4% level. A subsequent break above the 93.76 08-Jan high (and, therefore, above long term falling resistance on the Weekly chart) would next turn our focus on the 95.10/50 area, 61.8%recovery and Fibo projection.
[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]
Is the correction in Gold over?
Gold sold off after making an all time high in December 2009, and earlier this week, it looked set for a fresh rally, but the market has slipped. What lies behind this price action?
The Technical Trader's view:
WEEKLY CHART
The underlying bullishness of the market is derived from the massive H&S reversal that suggests a minimum move up as far as 1313.
The first impediment was the Fib cluster at 1221-1232.
But the pull back found support exactly where you might expect - the first Prior High at 1072.60.
Look closer.
DAILY CHART
The market bounced off that support from the Prior High, and when the resulting surge faltered, not well how the Prior High at 1114.50 was support again - ratcheting the market better.
There's no clear reversal in place yet, but the market appears supported for further bull trending in both the short and the medium-term
The Macro Trader's view:
Gold is a market that has enjoyed a clear underlying Bullish trend since early 2004. Along the way there have been several corrections lower, some of them relatively steep, but the market has on each occasion shaken off its malaise and resumed its bull trend.
More recently, Gold has tested the lows after making an all time high in December 2009. And earlier this week, it looked set for a fresh rally, but the market has slipped, what lies behind this price action and should bulls be concerned of something more profound emerging?
The rally in Gold has been driven mainly, but not entirely, by the weakness of the Dollar. So it is no coincidence that Gold began its correction at the same time as the Dollar began its own recent correction after a stronger than expected US Non-Farm Payroll report at the beginning of December 2009.
However, the strength implied by that December payroll report hasn't uniformly followed through in subsequent data releases. Once again, this has led to questions being asked about the strength of the US recovery which has resulted in the Dollar giving back some of its gains.
But the recent strength of Gold wasn't just due to the Dollar's price action. As the New Year began traders became more concerned about the level of government debt in many of the developed economies, but especially in the US.
With the current US administration set on a path of almost never-ending debt accumulation, the credit rating of the US has been subjected to scrutiny as never before.
The build up of debt, especially in the US, worries investors because they fear the US could be building up a problem it might struggle with in subsequent years. They think the financing of that debt could and probably will drive up long term yields, stifle recovery, hinder productivity and unleash inflation.
All of these fears are reasons to go long of Gold. But just as this market looked set to rally further, the gains were given back. Once again weaker US data was to blame, causing a deeper sense of angst about the recovery.
However, even if it is right to begin fretting about the strength of recovery (and we currently do not hold that view) the long-term outlook for Gold remains Bullish. If ,as we expect, the recovery gradually builds, traders will focus squarely on the budget deficit and debt, which will undermine the Dollar and support Gold.
If, on the other hand, the recovery falters or turns out to be much more anaemic than current expectations, then the outlook for the deficit and debt looks even worse as policy makers would be tempted to pump prime with yet another unaffordable fiscal stimulus.
In such a circumstance we believe the US would be in line for a sovereign debt down grade, the Chinese et al would voice their concerns about the Dollar's long term value even louder and Gold would make new highs.
Timing as ever is the key. For now we think this correction has a little further to play out. But don't be fooled into thinking this is a bear move: it isn't.
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:
WEEKLY CHART
The underlying bullishness of the market is derived from the massive H&S reversal that suggests a minimum move up as far as 1313.
The first impediment was the Fib cluster at 1221-1232.
But the pull back found support exactly where you might expect - the first Prior High at 1072.60.
Look closer.
DAILY CHART
The market bounced off that support from the Prior High, and when the resulting surge faltered, not well how the Prior High at 1114.50 was support again - ratcheting the market better.
There's no clear reversal in place yet, but the market appears supported for further bull trending in both the short and the medium-term
The Macro Trader's view:
Gold is a market that has enjoyed a clear underlying Bullish trend since early 2004. Along the way there have been several corrections lower, some of them relatively steep, but the market has on each occasion shaken off its malaise and resumed its bull trend.
More recently, Gold has tested the lows after making an all time high in December 2009. And earlier this week, it looked set for a fresh rally, but the market has slipped, what lies behind this price action and should bulls be concerned of something more profound emerging?
The rally in Gold has been driven mainly, but not entirely, by the weakness of the Dollar. So it is no coincidence that Gold began its correction at the same time as the Dollar began its own recent correction after a stronger than expected US Non-Farm Payroll report at the beginning of December 2009.
However, the strength implied by that December payroll report hasn't uniformly followed through in subsequent data releases. Once again, this has led to questions being asked about the strength of the US recovery which has resulted in the Dollar giving back some of its gains.
But the recent strength of Gold wasn't just due to the Dollar's price action. As the New Year began traders became more concerned about the level of government debt in many of the developed economies, but especially in the US.
With the current US administration set on a path of almost never-ending debt accumulation, the credit rating of the US has been subjected to scrutiny as never before.
The build up of debt, especially in the US, worries investors because they fear the US could be building up a problem it might struggle with in subsequent years. They think the financing of that debt could and probably will drive up long term yields, stifle recovery, hinder productivity and unleash inflation.
All of these fears are reasons to go long of Gold. But just as this market looked set to rally further, the gains were given back. Once again weaker US data was to blame, causing a deeper sense of angst about the recovery.
However, even if it is right to begin fretting about the strength of recovery (and we currently do not hold that view) the long-term outlook for Gold remains Bullish. If ,as we expect, the recovery gradually builds, traders will focus squarely on the budget deficit and debt, which will undermine the Dollar and support Gold.
If, on the other hand, the recovery falters or turns out to be much more anaemic than current expectations, then the outlook for the deficit and debt looks even worse as policy makers would be tempted to pump prime with yet another unaffordable fiscal stimulus.
In such a circumstance we believe the US would be in line for a sovereign debt down grade, the Chinese et al would voice their concerns about the Dollar's long term value even louder and Gold would make new highs.
Timing as ever is the key. For now we think this correction has a little further to play out. But don't be fooled into thinking this is a bear move: it isn't.
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, 14 January 2010
Copper – Awaiting Reaction at 76.4% Resistance
The Commodity Specialist view - The recovery in Copper that started in late 2008 continued through 2009 without much reaction to the downside. The upmove has finally reached the 76.4% recovery area of the major losses seen earlier in 2008 – it is worth keeping an eye out for signs of bull fatigue here.
- WEEKLY CHART - CONTINUATION: A long term bear channel top projection that we had been looking at did not, in the end, work as resistance. However, not far above this lies the 76.4% recovery level which could make bulls think twice. We are awaiting reaction around here.
- WEEKLY CHART – MAR-10: On the Weekly chart of the front month we note that the first interesting Fibo retracement of 23.6% lies close to the Aug-09 high, i.e. the 300 area should prove key in determining future performance.
- DAILY CHART – MAR-10: In the Commodity Specialist Guide we had been looking at a Fibo projection just below 350, which the market has so far been unable to hold above. On this chart the first hint of momentum loss comes from a break/close below the small bull channel base projection around 330 and the 3.2750 04-Dec high. The bear case would strengthen on a break below the 38.2% pullback level, with subsequent rallies then to be viewed as temporary ahead of further bear activity. Below here note that the key 300 area from the Weekly chart coincides nicely with the 61.8% level here, reinforcing its importance.
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Friday, 8 January 2010
EUR/CHF Slide – Time for Support?
The FX Trader’s view - During 2009 the technical interest in the EUR/CHF cross steadily waned, as price action remained confined in a relatively narrow range. One or two preliminary bull signs soon evaporated; and now there has been a decisive directional move – but to the downside.
- WEEKLY CHART: The multi-month consolidation in 2009 held above clear support around 1.5000. The recent break through this has been clear.
- DAILY CHART: The break below 1.5000 has been decisive, with this former support reverting to first key resistance. A 76.4% pullback level has now been reached, and we await reaction here – sometimes 76.4% can be an effective level in EUR/CHF (as it can be in EUR/USD and USD/CHF). A bounce from here would not surprise. However, the nature of the current chart structure suggests that this would be temporary ahead of further bear action. That 1.5000 area should be tough to crack, and note that, ultimately, the 1.5150 Dec breakdown point would need to be overcome to fully negate the current bear outlook.
[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]
Sugar Surge Reaches Key Fibonacci Area
The Commodity Specialist view - Last year’s acceleration upward in Sugar prices to a September peak was initially succeeded by bear enthusiasm. This faded in Q4 of 2009 and a bull resurgence has seen new highs, quickly reaching the next technical area on the long term chart – but it could be a struggle to push through this.
- MONTHLY CHART – CONTINUATION: Initially the market struggled to stay above the major 50% level of the 1980-85 downmove, but good support came from near the old 19.73 2006 high. The current upleg has quickly reached the 61.8% recovery level, and we await reaction around here – bulls could falter.
- DAILY CHART – MAR-10: A key reversal day on 27-Nov and then break of falling resistance gave initial bullish clues. The Sep-09 high has been clearly breached but we have calculated a Fibo projection on this chart (28.38) which, while eroded now, should be given some respect, as it coincides nicely with the long term 61.8% area. There is at least chance of a s/term pullback. Initial support is offered by the 26.25 Sep high, but it is the 25.00/24.00 support area that could prove key to future performance. [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]
Gilt Selling, Gilt Buying
Gilt selling is spirited, buying is muted.
The Gilt's many lives seem to have finally run out.
The Technical Trader's view:
WEEKLY CHART
The drama of the Gilt is three-fold:
First, the repeated failure of the market at the All-Time-High from 124.95.
Second, the pull back through the support from the Prior High at 116.08 which has held the market up since June 2009.
Third, while the market has been held up by that support, the sideways price action has described a complex but coherent continuation pattern which looks on the point of completion ... if the market closes beneath the Neckline currently at 115.97.
DAILY CHART
Short-term a precise bear channel has been created.
Note too, the recent rally to the top of the channel which failed not only (1) at the falling diagonal of the channel but also (2) at the two prior Low resistances - at 114.73 and much more short-term 115.04.
There are enough powerful bear forces above the market to stymie any buying
The Macro Trader's view:
Bearish at last! The Gilt's many lives seem to have finally run out.
Throughout 2009 the Gilt seemed to possess almost Teflon qualities as the Government pumped money into the economy to cushion against what has become the longest recession on record. In the process the UK budget deficit and debt to GDP ratio have soared leaving the UK at risk of a Sovereign credit downgrade.
But now the worst of the recession seems over, with Q4 GDP due later this month expected to show the UK economy emerging from recession. Traders have over recent weeks turned their attention to the Governments plans for restoring the public finances to a sustainable path.
A major source of support for the Gilt for a long time now has been the Bank of England's QE program, but this is set to conclude at the end of next month. While the Bank will not be draining the emergency liquidity injected, its absence from the secondary Gilt market is likely to prove a key factor in what we expect to become a classic bear market, so it is important the Government retains market confidence in its plans to reduce the deficit
When recession hit, extra spending by government was accepted as a necessary step to avert financial market collapse, but now that threat has passed the government should be looking to cut spending. The debt reduction plan they published late last year is regarded by virtually everyone as woefully inadequate.
But since a General Election is due by May/June of this year the credit rating agencies and investors, took re-assurance from a substantial opinion poll lead enjoyed by the opposition Conservative party who have clearly stated their main priority, if they win that election, will be to substantially cut the deficit and cut spending.
However, over recent weeks that has lead narrowed, and although it has since partially recovered, the event focused the minds of traders to what would happen in a hung Parliament. Basically, disaster! The deficit would continue to fester and the rating agencies would reduce the Sovereign credit rating, raising the cost of funding the debt and making eventual adjustment even more painful.
Then as if that wasn't enough for the Gilt to handle, two ex-cabinet ministers have called for a leadership vote, placing a question mark over Brown's authority.
In short, the Gilt is burdened by a runaway deficit, runaway borrowing, a government that thinks it can bamboozle the electorate and the markets over its debt reduction plans and now even greater political uncertainty. A bear market in Gilts looks odds.
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 Gilt's many lives seem to have finally run out.
The Technical Trader's view:
WEEKLY CHART
The drama of the Gilt is three-fold:
First, the repeated failure of the market at the All-Time-High from 124.95.
Second, the pull back through the support from the Prior High at 116.08 which has held the market up since June 2009.
Third, while the market has been held up by that support, the sideways price action has described a complex but coherent continuation pattern which looks on the point of completion ... if the market closes beneath the Neckline currently at 115.97.
DAILY CHART
Short-term a precise bear channel has been created.
Note too, the recent rally to the top of the channel which failed not only (1) at the falling diagonal of the channel but also (2) at the two prior Low resistances - at 114.73 and much more short-term 115.04.
There are enough powerful bear forces above the market to stymie any buying
The Macro Trader's view:
Bearish at last! The Gilt's many lives seem to have finally run out.
Throughout 2009 the Gilt seemed to possess almost Teflon qualities as the Government pumped money into the economy to cushion against what has become the longest recession on record. In the process the UK budget deficit and debt to GDP ratio have soared leaving the UK at risk of a Sovereign credit downgrade.
But now the worst of the recession seems over, with Q4 GDP due later this month expected to show the UK economy emerging from recession. Traders have over recent weeks turned their attention to the Governments plans for restoring the public finances to a sustainable path.
A major source of support for the Gilt for a long time now has been the Bank of England's QE program, but this is set to conclude at the end of next month. While the Bank will not be draining the emergency liquidity injected, its absence from the secondary Gilt market is likely to prove a key factor in what we expect to become a classic bear market, so it is important the Government retains market confidence in its plans to reduce the deficit
When recession hit, extra spending by government was accepted as a necessary step to avert financial market collapse, but now that threat has passed the government should be looking to cut spending. The debt reduction plan they published late last year is regarded by virtually everyone as woefully inadequate.
But since a General Election is due by May/June of this year the credit rating agencies and investors, took re-assurance from a substantial opinion poll lead enjoyed by the opposition Conservative party who have clearly stated their main priority, if they win that election, will be to substantially cut the deficit and cut spending.
However, over recent weeks that has lead narrowed, and although it has since partially recovered, the event focused the minds of traders to what would happen in a hung Parliament. Basically, disaster! The deficit would continue to fester and the rating agencies would reduce the Sovereign credit rating, raising the cost of funding the debt and making eventual adjustment even more painful.
Then as if that wasn't enough for the Gilt to handle, two ex-cabinet ministers have called for a leadership vote, placing a question mark over Brown's authority.
In short, the Gilt is burdened by a runaway deficit, runaway borrowing, a government that thinks it can bamboozle the electorate and the markets over its debt reduction plans and now even greater political uncertainty. A bear market in Gilts looks odds.
Mark Sturdy
John Lewis
Seven Days Ahead
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