Trading Ideas

June 17, 2011 4:59 pm

German Bund looking more appealing

Hard as it is to imagine today, Germany was considered the ‘sick man of Europe’ as little as five years ago. Low growth, falling property prices and high unemployment were symptomatic of an economy with chronic shortcomings. Since then, however, the country has clearly been discharged from the Krankenhaus. Productivity is healthy, exports are booming, and jobs are plentiful.

But while that is great for the nation’s stock market, these conditions have contributed to a malaise in German government bonds of late, with the 10-year Bund dropping hard between September and April.

Subsequently, though, the Bund has perked up. There are now clear signs that the global economy is slowing. This increases the appeal of better-quality government bonds. At the same time, fears are mounting over the difficulties in Greece, which could easily erupt into a further crisis within the eurozone. The experience of last year’s Greek panic sent investors scurrying for the safety of Bunds – and a repeat of that episode would likely have the same effect.

Perhaps the most accessible way to speculate on Bunds is via the euro-Bund future, a derivative linked to the 10-year German government bond, also offered by many spread-betting firms. Since April, its price has risen smoothly and confidently, which is the hallmark of a genuine uptrend, rather than of a counter-trend move. But, in spite of these gains, its weekly momentum indicators are not yet looking overbought. This leaves scope for the Bund future to press higher towards my next targets at 127.31, 129.07 and ultimately even 131.10.

In order to join the uptrend, I would attempt to go long when the price bounces off its 21-day exponential moving average, currently located at 125.09. According to my cycles-model, a very significant turning point is especially likely around November 25, although it will only become clearer in time whether a high or low is in store.

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