Bunds Slide as Traders Mull Higher-for-Longer
Comment of the Day

September 18 2023

Commentary by Eoin Treacy

Bunds Slide as Traders Mull Higher-for-Longer

This note may be of interest. Here is a section:

As evidence of economic stagnation increases the market is turning its attention to “how long the ECB will be able to keep rates steady,” said Mauro Valle, head of fixed income at Generali Investments. “It cannot be ruled out that the reversal of the monetary cycle may occur sooner than expected.”

Eoin Treacy's view

Germany’s economy is stagnating which is bad news for the EU and the ECB’s efforts to get inflation back under control. The reason the Euro is weak is the ECB is predicting they have done enough to get inflation down but the Federal Reserve has repeatedly said they will err on the side of overtightening because the risk of failing to get inflation under control is too high.

The fact the ECB is still running negative real rates suggests the threat of a wage/price spiral remains credible. Against a background of rising oil prices and uncertainty of supply, monetary officials probably believe they don’t have much choice.
Bund futures broke lower today to make a new reaction low. It has been a long time since I have seen such a clear example of a falling wedge pattern on the weekly chart. This looks like a developing type-2 bottom but a massive reaction against the prevailing downtrend will be required to confirm it.
The DAX Index is consolidating above the 200-day MA and in the region of the 2021 peak. A break below the trend mean would likely be a positive catalyst for the Bund market.

Meanwhile, the Euro steadied over the last couple of sessions but the two-month sequence of lower rally highs remains intact. 

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