Tuesday, June 3, 2014

Bund; Profit Take or Direction Change

There have only been two other instances before today in the life of the June 2014 Bund contract where it ended more than 60 tic lower from the opening level.  Following both of the previous instances back in February, the contract shrugged off the potential bearish development and continued to move higher.  Today’s price action follows a ‘doji’ which in candlestick analysis is recognized for pointing out indecision.  Indecision is not trend friendly and the trend has clearly been bullish.  Prior to the doji, there was a bearish ‘hanging man’ formation last Thursday. 

These two technical developments coming in front of the Thursday ECB rate and policy decisions are telling.  The market has shown confusion in the ‘doji’ on Monday.  A bearish reversal has been signaled by the ‘hanging man’ and it has been confirmed by subsequent price action. 

I suspect there are considerable funds at work positioned long in Europe’s long-end offsetting to an extent shorts in U.S. front-end.  We looked this morning at the decline in open interest in Eurodollars from trade yesterday and believe along with a relatively modest (50,000) decrease in the last CFTC reported ‘large spec’ net short Eurodollars, point to a possible removal of some of this trade. 

The implications for a declining Bund have global implications as the spread to U.S. 10yr Treasuries at 117 basis points is nearly as wide as any since 1999.  These low Bund yield have prompted foreign buying of U.S. Treasuries in a global search for yield.  A removal of this bullish support along with continued tapering expected and steady economic recovery should be enough to bring further selling into the Thursday/Friday ECB/NFP news.   

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