Bond Technical Strategy – Weekly by Lloyds TSB

Volatility has been excessive over the last few weeks in virtually all asset classes as the markets have headed towards the notoriously thin holiday market.

Volatility has been excessive over the last few weeks in virtually all asset classes as the markets have headed towards the notoriously thin holiday market. However, once the dust settled, the main upward trends for bonds have stayed intact. Unusually, this has also come at
a time when equities have been relatively well supported. With the VIX index dropping through the key 45 level, there is an element of a disconnect between bonds and equities (and currencies for that matter). This could be the thin market conditions, but it could also be a distortion, the likes of which have punctuated the markets this year. Therefore the cautious, but positive, short term view for bonds remain.

When looking for potential reversal factors, emerging market equities have the greatest potential over the course of 2009 and this may well become a burden for core bonds as the quest for returns eventually outweighs risk premium. Whilst there is no immediate risk of this,
it is worth monitoring the charts South American and Asian equities over the coming months to see if the current bullish set-ups can be built upon. For the reasons mentioned above, immediate traction will not be forth-coming, but most likely a sharp reversal will occur.
2009 promises to be another year of records as participant views remain diametrically opposed.

The commodity space is a classic example of where long term investors see value and where short term traders (rightly so) require more convincing the markets have based. The recent moves in soft commodities are important, but unlikely to shake bond holders’ conviction. Until we get a reversal in copper and oil, investors will stay relatively comfortable with holding bonds. The recent dip below $40 in crude oil offset any concerns in gold approaching $900 (which has subsquently sunk back below the key $850 level), but the prospects of $30 or below are keeping the retracements in bonds supported. How long the deflated prices will be sustained remains to be seen, but naturally we should get an early clue of the markets’
intentions from the price action.

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