Our resident chart expert, Jordan Kotick, Global Head of Technical Analysis at Barclays Capital is stuck at home in Princeton, New Jersey with over a foot of snow.
But that doesn’t stop him from studying the charts.
Here’s these week’s Q&A.
Q - Right now, there’s a lot of discussions about the debt crises in Europe.
Are the charts telling you anything about how the market is responding to the current environment across the pond?
A - We would best encapsulate the sentiment as 'skeptical". While spreads have calmed down recently… relatively speaking, rates in general are still holding their underlying bid. Translation: that means lower yields. Given the sensitivity of the front end of the yield curve, we note that European 2 year yields are still hovering near the bottom of the range that has contained trade for over 12 months. Below this level (0.95%-1.00%) would be a stark break, suggest higher prices, lower yields, and a continued flight to safety and lack of confidence overall.
Q - Is the US bond market indication the same thing?
A - While related, the US market s a little different, given the comments by the FED about the discount rate today. 2-10, a good benchmark for the yield curve, has clearly slowed down its steepening (upside) move over the last few months. Traditionally, the yield curve is a leading indicator that tends to reliably anticipate changes in interest rates ahead of time. So far, despite the lack of momentum to the topside, this section of the curve is still holding the upside trajectory. But a break to the downside this year would be a strong leading indicator that the bond market may be pricing in higher interest rates, whether or not they have actually happened yet.
Q - With Interest Rates in the news, the strong sell off in stocks from last week seems to have slowed down. What are you watching right now?
A - Many markets are testing simple but effective pivots like their 200 day moving averages. The MSCI world Index, AUD/USD, NZD/USD, the Nikkei etc are all teetering on or near these chart pivots. At these areas, the markets tend to pause, profits are taken as traders wait to see if these areas will break and thus initiate fresh selling.
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