Technical Analyst, Saxo Bank Group
Summary: European yields have been on the rise since the beginning of the year in what is probably the steepest and fastest rise ever seen. The 10-year yields are now reaching levels not seen in almost a decade but there are likely higher levels in coming months and year.
Ahead of ECB Emergency meeting today let’s have a look at Euro 10 Years Yields and Future from a technical perspective.
The Euro yields have been on rise since the beginning of 2022 and have now broken the long-term falling trend going back to the 1990’s.
Since 2008 it has formed a falling Wedge like pattern which is broke bullish out of last year. Yields are now close to reach 0.5 Fibonacci retracement of the “peak to low” of the Wedge where there is some resistance. Expect minor correction around this level i.e. at around 1.95%. Yields might try to break 2% but not unlikely to fail breaking above in first attempt.
If breaking above 2% next key resistance is at the 0.764 retracement at around 3.35%. A level not seen since the Eurozone crisis in 2010-2011, where several emergency and bail out packages where issued and ECB started buying Government bonds. See timeline here https://www.bbc.com/news/business-13856580
However, according to the theory of Wedges the price should reverse to at least the peak of the Wedge (for a falling Wedge) i.e. in this case at it would be at around 4.6%. If that scenario unfolds it would be a yield level not seen since 2008 when the Liquidity/Financial crisis was unfolding. With regards to time line, it is always hard to predict but after the break out of a Wedge the move back to the top range of the Wedge is much faster than the time span of the building of the Wedge. Roughly 20-35% of the Wedge time line i.e. 2-4 years. Break out was a year ago.
The Euro Bund future has dropped 7% in June alone. Since The future closed below key support at 167.52 back in February this year it has taken out one support level after the other. It paused briefly at the top range of the strong support area 151.44-149.60 in May but has accelerated sell off from the start of June, now trading below 200 Monthly SMA with no strong support before around 138.40-136.40. 136.40 is 0.618 Fibonacci retracement of the 2008-2021 Bull market.
This level is likely to be reached but do expect a rebound from here. However, looking a bit longer-term i.e. end of the year going in to 2023 lower levels are not unlikely. If Bund future closes below 136.40 there is no strong support until around 120.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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