Euribor spread analysis

Euribor spreads have fallen in the front end as it is almost certain rates are going to remain low for some to to come. As Dec09 Euribor comes closer to expiry the spread between Dec09 and Mar10 will likely continue to fall until it is at parity or negative. The dec-march spread is trading at 6.5s falling from low teens last week as Euribors continue there march upwards.
Short sterling paints a similar picture, as the bank of englands decision to keep the possibility of further quantitative easing open has kept short sterling bid. Coupled with the fact the UK is still in a recession suggests that rates are going to remain low for a long time still. Front month short sterling Dec-Mar spread has come off 5 ticks from last week as we trade 11s. It is also likely this spread will continue to come as we reach closer to Dec Short sterling expiry.

Bund analysis

From a technical perspective the Bund continues to trade sideways trapped between strong resistance at 123.00 and support at 120.00. Messy trade has continued over the last five days and at current there appears no bias in either direction. The US Ten Year continued to outperform the Bund as it reached highs of 119.230 last night. The high of the previous double top formation at 119.290 appears to be under threat and a test of this level later this week looks likely. If this resistance were to break, further levels to the upside can be found at 120.180 and 121.095.
Last night Bernanke highlighted his concerns over a weak labour and slow recovery and in doing so signalled that current exceptionally low rates were here to stay for the foreseeable future. This was taken as very bullish news by the treasury markets as concerns were eased over the timing of the Fed’s exit from monetary stimulus. With this now in traders’ thoughts we would expect to see a flattening of the yield curve over the next few days as the longer end attracts more attention.
The only fly in the ointment of the Fed’s plans for an extended period of low rates could come from a surprise rise in inflation data. This week we will see the release of US PPI and CPI. Both of these are seen as backward looking so a figure above analysts expectations may be send jitters through the fixed income markets as this could interrupt the Feds plans. We do not expect these to surprise to the upside but they must be considered the best indicators when predicting the timing of the Feds removal of its low rate policy.

Bond overview

Overview
Over the last five days we have seen an increasing degree of volatility in the Bund and despite messy trading it has posted gains of almost 1 point. The performance of the US Ten Year was more impressive as it capitalised on equity weakness in rallying almost 2 points at one stage

From a technical perspective the Bund is looking increasingly bullish despite the daily double top formation still being in place. An hourly inverse head and shoulders has formed which also contains an hourly bull flag. The neckline of the inverse head and shoulders formation is 121.69, with the target being recent highs at 123.04 (incidentally there is a very similar target for the hourly flag). If this target was reached it would give the bulls another crack at breaching the double top formation opening the door for a significant push higher. A similar inverse head and shoulders formation can be seen in the US Ten Year with a target beyond the previous daily double top formation. The neckline is at 118.260, this provides a relatively low risk trade with a target at 119.170.

This week will see rate announcements out of the ECB, BOE and Fed, and although no rate changes should occur, the accompanying statements have the potential to move markets dramatically. We will be keen to see whether the BOE extends its QE scheme, at this stage many analysts are touting a £30 billion extension but many permutations are possible. The only surprise we feel the ECB could spring on the market would be a schedule for the removal of the LTRO, this is something member Webber hinted at last week and Trichet may further comment on this Thursday. Finally on Wednesday we will get the latest statement out of the FED, and we are keen to see if they remove any of their liquidity programmes.

Last night Australia raised their interest rates for the second time this year and although it is not a good indicator for Europe or the US it is a reminder of what is to come and will no doubt affect traders psychology as more countries look to rate hikes.

(Taken from futex)

Bank of England minutes signal end of easing

The absence of any signs of Quantitative easing extension prompted a huge sell of in the short end yesterday as traders started to place there bets on the end of the easing cycle and that rates will start to be heading up.
Short sterling contracts came off over 20 ticks from sep10 onwards, with the front month dec09 mar10 spread trading 6 ticks higher. Cable jumped over 250 pips as the dollar lost ground again, and we saw a breach of 1.50 in the Euro dollar too.
Euribors dropped 8 ticks, and the bund was down over 80 as bonds started to reflect higher yields after being kept low for so long as the large availability of cash has been used to buy up the stocks and bonds.
However it remains to be seen whether we are really in a fully fledged recovery as, this morning UK retail sales came out weaker then expected and reminded as the consumer spending is still fragile.
Stocks are selling off today after a late sell of in the US yesterday night as an analyst downgrade of Well fargo prompted profit taking after a huge run up. However with many companies earnings still handily beating estimates, it is likely there wont be too much pressure to the downside for long.

Stocks continue to rise as earnings please..

The party continues as we are vey nearly approaching 10000 on the Dow and 3000 in the eurostoxx. Good earning from Johnson and Johnson and Intel have buoyed the positive sentiment, and lifting the futures this morning. We have a raft of earnigns reports with JP morgan being one of the big ones before the US market open this morning. It is likely they will beat estimates, but any shortfall could see a reversal in stocks.

Looking at the S&P the double top formation at 1075.75 in the S&P 500 Dec. futures appears to have only provided temporary respite from the underlying bullish trend. The only possibility for this being a turning point is if it develops into a larger double top formation, although looking at the underlying strength this does appear a bit of a punt. Above recent highs, the 50% fib. retracement of the entire down move is at 1126.25 in the S&P 500, and 5921 in the Dax 30. A break of these levels would really scare equity bears and would like lead to an accelerated move upwards.
Euribor spreads have fallen some what as traders bet on when the rate increasing cycle will begin. It is still not likely to happen until next year, but eyes will be mainly focused on employment data as that will need to improve for a true economic recovery to take place.

Bears have their say, earnings season start tomorrow

A trio of bears weighed in today. It's hard to argue with any of them.

Soros says our banking system is "basically bankrupt" and consumers have debt coming out of their ears.
Roubini thinks the market is discounting a "v-shaped" recovery and will therefore be disappointed with a "U"
Robert Prechter (Elliott Wave guru) says the bear market resumed in September. Prechter, of course, is predicting a full blown Depression.

Yet despite this we are rallying hard in stocks, as earnings season begins tomorrow.
The attempted pullback was short lived as it looks that we are heading for new yearly highs again.
Bunds remain elevated despite the equity strength.
Traders will be looking to a new direction from the ECB as the monthly rate decision will be taking place. It is unlikely that there will be any change in rates, but what traders will be keeping an eye on is whether there will be any signs of withdrawal of monetary easing.

Weaker consumer confidence puts dampener on stocks

A weak consumer confidence number put the brakes on a relentless rise in the stock market as the eurostoxx crossed 2900 for the first time since last year.
Short sterling dropped over 15 ticks as Bank of England's King cites that he was unhappy at the market reaction to his recent comments regarding Pound Sterling level. This triggered a sell of the STIRs and a rise against the currency basket after getting smashed in the previous sessions.
Home prices rose for the third month in a row in July, new data Tuesday showed, more proof a fragile housing recover is under way.
The Standard & Poor's/Case-Shiller home price index of 20 major cities rose 1.2 percent from June to a reading of 143.05. Though home prices are still 13.3 percent below July a year ago, the annual declines have slowed in all 20 cities for the sixth straight month. This further aided the resilience of the global equities.
This Fridays US jobless number will be key this week as we see whether the DOW can push pass 10000. Expectations is for another improvement, with some estimating a gain in jobs.
Whilst the economy is slowly picking up the 60% increase in the S&P 500 from the march lows looks likely to continue as cheap money is fuelling more demand for equities and this looks likely to continue until rates start to rise.