Are German Bunds Recovering?

By: Seven_Days_Ahead

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:

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:

1. German economic data had been very strong, suggesting the Euro zone as a whole would be dragged better by the German locomotive,
2. 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
3. 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:

1. 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
2. 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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