A Tale of Two Bonds

A Tale of Two Bonds

It was the best of times, it was the worst of times.  It was the age of bullishness, it was the age of bearishness… (as Charles Dickens almost wrote).

On Thursday, Carney unleashed his version of the Big Bazooka by lowering UK Bank Rate and oiling and then re-starting his printing presses to buy oodles of gilts and now corporate bonds to add to his already mammoth stockpile..

Inevitably, this sent UK gilt yields plunging (prices up) as traders had visions of Carney’s big fat finger stuck on the Buy button for months to come.  The front-runners had a field day.  Here is the chart of Long Gilt

On Thursday, prices moved into new all-time highs above the nosebleed 131 level.

Then yesterday, the US non-farms was released and was instantly interpreted as very bullish for shares and the economy – and increased the likelihood the Fed would increase Fed Funds sooner rather than later.  This is how the T-Bonds reacted:

The market sold off heavily back into chart support. Remember, I have named T-Bonds as one of my Trades of 2016.

And with US rates about to turn up (see my forecast in blogpost of 19 July)  and UK rates down, we have a huge divergence opening up.  And that divergence is about to get wider – and will impact cable in a big way.  My long-standing view has been that GBP/USD is in a long-term downtrend and should head towards dollar parity (with intervening rallies, of course).  My main target in the meantime is the 1.14 area.

It seems Carney is hell bent on supporting share prices and driving sterling lower to help exporters. It is not about forcing consumers and companies to go out and spend, spend, spend. The UK has a huge current account deficit and with a weaker pound, it is destined to get wider – much wider.  In the short term, this will push up consumer inflation – and increase inflation expectations to the point where the gilt market will get a Wile E. Coyote moment – and sink hard.

But for now, everyone expects UK rates to go even lower – even the BOE says so, so it must be true, right?

One of the reasons I forecast the top in T-Bonds last month was the extreme bullish sentiment as measured by the DSI data where bulls numbered 96% of market professionals.  Sadly, there is no equivalent sentiment measure for UK gilts, but I imagine bullish sentiment is likewise at or near an extreme.  This is a recipe for a ‘surprise’ downward lurch at some stage, according to my Law of Extreme Sentiment.


German DAX thrusts higher

We have been long DAX for a few weeks based on my reading of the EWs.  The market has pulled back from its highs of 12,400 in March last year, but into solid chart support.  And the decline can be counted as a large A-B-C correction.  I also have a good tramline pair working.  Here is the weekly:

From the C wave low, I can count a possible waves 1 and 2 (purple), but to confirm, I need to see a strong thrust above my upper blue tramline just ahead.

But this area is also a Fibonacci 50% retrace of the entire move off last year’s high – a formidable area of resistance.  But if we do have a genuine third wave up, then it will take out this resistance swiftly.  The test lies directly ahead.  A failure here would imply the rally is not a five up, but an A-B-C and the next move will be down.


Silver is up – then down

I noted the textbook wedge with five clear internal waves and the classic upside break on 27 July and forecast a thrust up.  That certainly occurred, but significantly did not make a new high:

But the thrust did form a classic ending diagonal on a momentum divergence – and that was the signal the rally was ending.

With yesterday’s 50 cent swoon, market is now heading for the classic retracement which is back to the apex of the wedge.  But the move down in gold and silver yesterday after the non-farms was at variance with the Dow/S&P.

The latter moved sharply higher, despite the outlook for higher rates, whereas PMs did the opposite.  In general, silver (a mostly industrial commodity) follows stocks – but not yesterday.  Perhaps this disconnect is significant – and heralds an imminent top in stocks.

So may be we shall see such a move down  in shares that will satisfy my long-held wish to see bonds and stocks decline together.  After all, bullish sentiment towards both assets remains sky-high.

2 thoughts on “A Tale of Two Bonds

  1. I agree that divergence between rates in the UK and US will mean the dollar heading towards parity and therefore imports into the UK becoming more expensive.
    But, this is likely to be offset to some extent by the cheaper pound making UK goods more attractive to overseas buyers, and by companies and individuals based here receiving significantly more income in sterling from their worldwide operations. A rise in imports is also going to be tempered by consumers attitudes, particularly if a sinking pound, no interest on savings and worries about Brexit fallout makes them become more prudent. They might think twice about that new BMW. Doesn’t this mean that the trade deficit gets worse rather than the larger current account deficit?
    Also, a modest rise in inflation would probably bring cheers all round given than most of the world is struggling to deal stave off deflation. A rise in inflation to 2-3% would maybe be healthy and not therefore lead to an automatic rise in UK interest rates. A rise to 4-5% would be a different matter.
    So, yes to a move towards $/£ parity, yes maybe to a small rise in inflation, but no at the moment to a sharp turn up in UK interest rates.
    I passed all my TA exams with the Society of Technical Analysis but am still struggling with Elliott.

  2. I buy the long term prediction that the bond and stocks bubble will burst soon and likely together or not far apart. For my money it may start with a devaluation of the Yuan (or the heavy drop will, the initial turn may simply be driven by altitude sickness). I also buy that Gold and Silver will go on a massive Bull run correspondingly as the only safe port in the financial storm about to be unleashed.

    I do not buy the comment about Silver tracking stocks. If you look at the long term chart since 2011 Silver has acted like all other commodities, including Gold, inversely to stocks. The commodity bubble burst on 2011 but other markets did not follow and that is not normal (central banker interference and CEO/CFO financial engineering propped up stocks and bonds but the real economy has been in a slide since 2011). There is a notion doing the rounds that in absence of any sensible investment and with currency precarious owning real commodity assets is the right play (having said that I find it hard to see Oil and Copper going on a strong rally with failing global demand but Gold and Silver as an alternative to currency? That I can see). I would love to hear more about where John thinks Gold will go short term. I think it retraces over the next month to form an EWT 1-2 (on the weekly chart level) while stocks go on their final wally rally before Gold then goes on it’s big wave 3.

    I do not buy the A-B-C EWT on the Dax, although I can see the possibility. I think the Fib 62% (rather than 50%) is the big test of whether the right EWT is A-B-C or 1-2(1-2). If the US markets do top out where JB has indicated they might (19000ish on the Dow) then the Dax is likely to hit the Fib 62%. In fact the Dax and FTSE offer better top identification possibilities because they are currently in retrace whereas the US markets are in white space.

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