Mixed Signals

Submitted by Nic Lenoir of ICAP

We start with Fixed Income. With supply next week and unemployment report on Friday we had a preference being short fixed income this week. Technically we see that on the bund we have been in a narrow 123/123.65 range, and the slow stochastic is about to turn which has not generated a false signal in quite some time for that market that decent sell-off of at least 2 figures is on the way. 10Y treasury futures have held the 118-10 resistance but curiously look like they are in the process of doing a 5th wave up with potential between 118-27 and 119-05. It is not ou preference to view the recent price action as a bullish impulse with respect to the overall market dynamic since the highs last March but we remain cautious about the possibility of extending further on the upside. The bund paints a slightly more bearish picture for now. Still we are fairly overbought here and we think the risk reward is tilted to the downside. People who do not wish to express this view directionally can engage in a 5s/10s flattener (charted here using implied yield on the future). We see that we are back testing the former wedge support as resistance and we are fairly close to the highs excluding the post-lehman spike in the curve. Negative carry on the position is only 9bps per quarter so it is not too expensive to hold the position as well.

Interestingly if bonds look set to turn lower here, equities have reached some targets on the upside already. Most clearly is the Dax where we have retested the 100-dma, the overlap with the high of wave 4 of lower order, and the 38.2% retracement of wave 3. We feel there is a risk to sell-off here unless above 5,725 tomorrow. On the downside the target is 5,420. In S&P we have reached the first resistance just under 1,103. We could sell-off back down to 1,065 or even 1,051, but we favor waiting 1,117 to express shorts there with conviction again.

On a side note, selling AUDNZD as recommended on 01/27 has worked marvels and we still look to reach 1.2250 and possibly 1.2000. The RBA caught a lot of people still long the AUD and there is probably more unwind coming. We favor AUDNZD as a way to express it as it has little beta so the relative value allows to size up positions and trade outside the noise of most other asset classes.

Good luck trading,

Nic