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Technicals Clearly Winning

15 December 2016 by Mark Holman

Now we have got ‘that rate move’ out of the way, we thought that we could mix up your morning news flow by talking about non Fed related matters! Namely what the market’s reaction to surprise events tell us about the technical situation.

It is clear that timetabled events in the market place are easier to digest than surprises, and this is exactly what has happened both for Trump and thereafter for Renzi. One feature of both has been that investors accumulated cash ahead of the events and then consequently have struggled to redeploy that cash into the market place, regardless of the news.

In our fixed income markets where we have to trade through the narrow plumbing that is the over-the-counter investment banks, this has been exacerbated by the fact that they held very little inventory going into these events. Investors looking to buy assets are effectively taking them short, which they are reluctant to do without moving prices higher. Compound this with very low fresh fixed income supply, especially in the high yield markets, it’s easy to see how a squeeze develops. For example, in Europe there has not been a genuine benchmark high yield bond deal since the US election, and we are unlikely to see one now until next year.

In the meantime, investors are encouraged by the lack of volatility so the market is also receiving inflows into the Christmas squeeze. Very simply, technicals have had the upper hand in the last month and it is hard to see what will change that currently. A little bit boring, but we deserve some of that after the year we have been enduring!

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