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THE SPECULATOR
Prepared by Berkeley Futures, Ltd.
Interest Rate See- Saw
Twenty years after bailing the UK out of a sorry economic plight overseen by a Labour government, the IMF are now holding up the UK economy (ironically once again run by a Labour government) as a shining example for the rest of Europe to follow. European countries meanwhile remain bogged down in their efforts to ensure that they make the starting line for EMU in 1999.
In the midst of all this, the economic statistics from Germany have begun to display signs of an economic upturn. However, with inflation rising above two percent, speculation has increased on exactly when the Bundesbank will increase interest rates. By contrast, the rise in UK rates earlier this year and the subsequent weak inflationary pressure have led many to question whether short-term interest rates in the UK have peaked. This view is now reflected in the short sterling futures. These see-saw moves in German and UK interest rates obviously have implications for the relevant bond markets and in this context it is interesting to examine the technical outlook.
The Bund futures contract has been moving in a wedge formation since the beginning of 1995. The upper trendline resistance is currently at 105.45, whilst the lower trendline support is at 100.05.
The price is presently sitting above both the 90-day moving average at 101.89 and the 200-day moving average at 101.51 which suggests that further short-term gains could be seen. For this to occur, the strong resistance level at 102.44/48 must be taken out, followed by the resistance at 103.51. If both these levels can be exceeded, the 105.45 trendline should be tested, but it would need a rapid break of this level to maintain an optimistic view on the price.
In the longer term, the shape of the wedge with its alternate touches, suggests that price gains will be short- lived. This would be confirmed by the price breaking down through the 90- and 200-day moving averages, in which case the 100.05 support line will be tested. There is some chance that this line could be broken at the first attempt but, even if it is, the support line at 99.15 should stem the decline, allowing a counter rally to occur from that level.
The UK gilt future has been on a rising trend since the latter part of 1994. This trend is currently at 108.20.
Since the middle of 1996, another steeper uptrend line has also been established and this trend is currently at 110-29. Once again, the price is above the 90-day moving average at 114-16 and the 200-day moving average at 112- 14. The 90-day moving average has been particularly good at providing support for the price action and, whilst the gilt price remains above this average, the outlook for the gilt has to be positive.
The recent price action of the gilt has seen an acceleration of the price gain, which tends to suggest that the price may be able to force its way high enough to confirm a long- term channel. This provides a target of 118-13 for the gilt future, but is not likely to be exceeded as the Relative Strength Index is now moving to levels above 70 and will be giving overbought readings at the channel top. From this level a correction to the midpoint of the channel at 114-00 should be expected. If there was sufficient momentum to break upwards through 118-13, the next objective would be 120-24.
Although on balance, the outlook for these markets in the short term is positive, in both cases the upside potential is limited with objectives not that far above the present market levels.
September 22, 1997David Cocker
Berkeley Futures, Ltd.
38 Dover Street, London, UK, W1X 3RB
Copyright 1997, by Consensus Inc. All American and Pan American rights Reserved. editor@consensus-inc.com
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