Rising Risk Aversion – Longs On German Bunds Recommended
Considered as safe-havens, bonds usually become more attractive when the markets experience instability. One of Europe’s benchmark sovereign securities, Germany’s 10-year bund, rose in Monday’s trading session as uncertainty resulting from the “Brexit” has not retreated completely.
As investors sought a safe place to park their cash, expecting market turmoil, yields on German government bonds turned negative once again post Britain’s EU Referendum and reached a record low of around minus 0.17%. For the last several days, yields have kept heading downwards and have not yet witnessed any strong bounce back. The head of euro rates strategy at Mizuho commented that the bank now anticipates that German Bund yields could decline to minus 0.2% this year, compared with previous estimates of zero percent.
The euro zone economy is completely exposed to the downside risks of Brexit. Hence, in order to relieve mounting pessimism over economic growth, the European Central Bank is expected to implement further reduction in its benchmark rates, as well as deploy additional quantitative easing measures in the upcoming months.
In a conference last weekend, ECB Executive Council member Coeure stated that the British decision in favor of leaving EU would cause further setbacks to global markets. However, he indicated and expectation that these impacts may be short-lived and stated that the central bank is ready to stabilize the situation.
Earlier today, Sentix released its monthly survey on EU investor sentiment. The data came in at 1.7 points in July– the lowest level since February 2015. Meanwhile, the reading for the preceding month was at 9.9 points. Weakening investor sentiment indicates a lack of belief in growth, implying that the euro zone could enter a period of further slowdowns/recession.
On July 06, ECB President Mario Draghi will deliver a speech in Frankfurt. Some clues and statements on current and future monetary policy are awaited. Additionally, on the same day, FMOC will release its minutes from the June meeting, which may provide deeper insights into the Fed’s view on current and medium term economic and financial conditions. Dovish leanings of the US central bank on future rate hikes may help further bolster German bunds, as expectations of interest rate hikes decrease.
Fig. German 10-year bund D1 Technical Chart
German bunds are creating a gradual up channel and hit a record high of 167.343 on the last day of June. A higher-than-average reading of RSI (14) indicates that the bulls are strongly dominant. The price is expected to enjoy support from the two MAs below and may continue to climb further. The trend indicator has suggested longs positions since May 11.
Buy stop at 167.075, Stop loss at 166.519, Take profit at 167.534