Technical Analyst, Saxo Bank
Summary: The short- and medium-term outlook on yields and interest rate futures are sending mixed signals in USA, the Euro Zone and in the UK. Market action and some indicators point to lower yields but that picture can quickly reverse. Range bound trading could be the market on the short term before a direction is decided
US 10-year Treasury yields was rejected at key resistance at 3.90% following the bullish break out of its falling channel. During the breakout RSI closed above 60 threshold i.e., now showing positive sentiment indicating higher yields.
However, yields could be stuck in a range between 3.90 and 3.60 for a while. 55 daily MSA is declining but 21 and 100 daily SMA’s are rising kind of boxing in the yield movement.
A close above 3.90% and yields will be eyeing previous highs around 4.32
A close below 3.60 could sent yields back down to test December lows at 3.41.
The US 10-year T-Note future is of course displaying almost similar picture (Just opposite).
Support at around 111 28/32 and resistance at around 113 22/32.
A daily close below support October lows are in play with support around 110.
A daily close above resistance December peak at around 110 7/32 is likely to be tested.
Mixed picture on weekly and monthly time period
Medium-term illustrated by the weekly chart has been showing divergence on RSI at the Q3 down move. Several times has RSI been rejected at 50 question is, will it be rejected again or finally break above? If RSI closes a week above 50 there is upside potential for the T-Note future to 117 possibly 119.
Euro Bund future has bounced from new yearly lows forming a Bullish Engulfing bottom and reversal candle on the first trading day of the year. The bounce comes after divergence on RSI.
Currently the Future is testing the 0.382 retracement but there is potential to move higher to the 0.618 retracement at around 139.26. 100 daily SMA is likely to provide resistance
RSI is still below 60 i.e., showing negative sentiment and needs to close above 60 to reverse that. That is key the next few days.
On the weekly chart Euro Bund is trading in a falling Wedge like pattern with massive RSI divergence. Trading this week is currently drawing a Bullish Engulfing bottom and reversal candle which combined with the RSI divergence strongly indicates a rebound. If the future closes above the upper falling trendline 143.38 will be key on the medium-term. A close above and Euro Bund has reversed its downtrend.
UK Gilt future has bounced from 0.50 Fibonacci retracement at around 99.65. RSI still showing negative sentiment and needs to close above 60 to revere that. If Gilt can move back above the 55 and 100 daily SMA there could be more upside to around 106.80.
RSI divergence: When instrument price is making a new high/low but RSI values are not making new high/low at the same time. That is a sign of imbalance in the market and an weakening of the uptrend/downtrend. Divergence or imbalance in the market can go on for quite some time but not forever. It is an indication of an exhaustion of the trend
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
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.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.