3rd May 2012

UPDATE

Bunds lead the pack higher

Technical Fundamental

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Bunds lead the pack higher

Euro Bund C ontinuous 151 150 149 148 147 146 145 144 143 142 141 140 139 138 137 136 135 134 133 132 131 130 129 128 127 126 125 124 123 122 121 120 119 118 117 116

WEEKLY CHART
The bunds have been driving better in a well-structured bull trend since 2008. Note well how prior Highs have been powerful support, ratcheting the market better. And note too how the prior high supports 140.23 and 140.52 have just been surpassed. They can now act as the springboard to drive the next bull leg.

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140.52 High 140.23 High

134.77 H igh

UPDATE Technical Fundamental

119.86 Low 118.48 Prior High Piv ot

D 2008

A M J J A S O N D 2009

A M J J A S O N D 2010

A M J J A S O N D 2011

A M J J A S O N D 2012

A MJ J

DAILY CHART
Euro Bund Jun 12 261.8%

109.66 Low

145.0 144.5 144.0 143.5 143.0 142.5 142.0

109.66 Low

141.37 High 161.8% Prior High Pivots from continuation chart 140.23/52 140.44 HIgh
141.5 141.0 140.5 140.0 139.5

The detailed daily chart for the June 12 contract ( rather than the continuation chart) shows the breakout from a tight trading range that led to a rally to the Prior Highs from the continuation chart. The market paused at those Prior Highs and only finally and emphatically overcame them when the pull-back from 141.37 bounced so spiritedly. The break of the near high at 141.37 is another piece of bull evidence, another potential bull trigger.

138.51 High

139.0 138.5 138.0 137.5 137.0 136.5

135.52 Low 135.22 Low 0.0% 134.77 Pr ior High from weekly continuation chart

136.0 135.5 135.0

500000

Disclaimer

16

23

30

6 February

13

20

27

5 March

12

19

26

2 April

16

23

30 7 May

14

Bunds lead the pack higher

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FUNDAMENTALS: The Euro zone is still in the middle of a Sovereign debt crisis that has affected countries as diverse as Portugal, Ireland, Greece, Italy, Spain and even France. Other Euro zone countries have also been forced to enact austerity measures, even though they may not have grabbed the headlines. With the sustainability of Government debt in the Euro zone being at the core of the problem, many might ask the question; why is the Bund so bullish? Although the Bund future is a Eurozone-wide bond market, the underlying instrument is the German Bund. Until recently the German economy seemed impervious to the economic slowdown gripping the rest of the Euro zone which was in large part a result of the Sovereign debt crisis and the austerity measures prescribed by the EU/EZ/IMF to contain it. Naturally as affected countries saw their credit ratings cut, investors sought safe haven trades. For some, at various times, that meant buying either: 1. The Dollar, 2. The Yen, 3. Gold, or 4. Bonds, mainly US Treasuries, the UK Gilt or the Bund. In some ways buying the Bund against selling the Bonds of the embattled Euro zone periphery was seen as a way of creating a synthetic foreign exchange trade in case the Euro actually fragmented and National currencies re-established in the likes of Greece.

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Bunds lead the pack higher

FUNDAMENTALS: CONTINUED
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More recently the Bund has rallied as the Euro zone economy has relapsed into recession. But now it isnt just the weak periphery that is suffering from economic weakness, Germany too is feeling the strain and German PMI manufacturing surveys point quite clearly to recession. The ECB is however unwilling to ease policy further, even though it could cut by up to 100bp. Furthermore it is unwilling to engage in Quantative easing in the same way the Bank of England, the Bank of Japan and the Federal Reserve have, due mainly to resistance from German politicians and the Deutsche Bundesbank. And although inflation in the Euro zone is a little above target at approximately 2.6%, that seems almost irrelevant. The core issue here is the future of the Euro zone. The austerity measures currently in place look set to consign the majority of the Euro zone to long, deep and damaging recession. In such an environment inflation will eventually drop and maybe too far. More recently there has been a change of political mood in some countries. The most obvious is France where the French are in the process of electing a new President and the front runner is a socialist who wants to change focus and prioritize growth. However the Germans who are the paymasters of the various Eurozone rescue funds are not persuaded. They see the Eurozones salvation in fiscal consolidation via austerity. We judge with little chance of any new monetary policy easing from the ECB and the chances of a deep recession increasing the Bund looks set to extend its crisis driven rally much further.

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