Best Financial Markets Analysis Article 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?

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:

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

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
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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Mark Sturdy, John Lewis & Philip Allwright, write exclusively for Seven Days Ahead a regulated financial advisor selling professional-level technical and macro analysis and high-performing trade recommendations with detailed risk control for banks, hedge funds, and expert private investors around the world. Check out our subscriptions.

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