Make Sense of Markets, Technical Outlook, Edition #208 (20/04/2022)
Q blazes it up in tonight's technical analysis 🔥 Read on for a deep dive into Bond Yields, Big Four Banks - and roll it all up with some dank Cryptocurrency charts 👇
Bad news, Bears...
Support is support until the evidence proves otherwise.
Moreover, the most recent price action analysis suggests that the cryptocurrency market may not be far from finding its floor.
Before diving into the technicals, some scrutiny on the overall state of affairs across the macroeconomy will help us see whether they reflect on price charts.
Let's start with the blood-bath in the bond market—where markets saw bonds selling en masse and demand for banks shooting upside...
Unlike exchange-traded stocks, bonds are financial securities that do not represent a stake or ownership in any particular company. In their rawest format, bonds are a long-term interest-bearing debt obligation—also known as an IOU—generally offered by large corporations or government bodies to raise capital funding.
It is not uncommon for bonds to be issued over ten years terms or higher and pay fixed amounts of interest, in the form of coupon payments, until reaching maturity.
Investing in bonds might sound simple in theory.
But, where do many investors go wrong?
Bonds are issued at their face value and have an inverse correlation with interest rates.
Face value refers to the price that the bond issuer pays at the debt's maturity.
Interest rates have now been at ultra-low levels for such an extended time that bond yields have since sky-rocketed. But, being fixed in duration, the investors face losses if banks suddenly lift their rates.
The Fed plans to raise interest rates many more times to combat inflation. At its current trajectory, the central bank's target key cash rate will be 2.9% by the end of 2023.
An environment of negative real yields underscores the decaying effect of consumer price inflation on the Dollar's purchasing power. However, positive real yields may imply more attractive returns from fixed-income securities while inflation expectations remain at 2.92% for the decade.
Real yield is calculated by subtracting the expected annual inflation rate from a bond's nominal yield:
Real yield = Nominal yield of a bond (coupon rate) - Expected annual inflation rate
Real yields can be a helpful indicator because they can act as a measure of how much the bond's yield can compensate for the decrease in currency purchasing power.
Naturally, this warrants a review of the US 10-Year Government Bond Yield, US10Y.
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The information on this website is for general information purposes only. It is not intended as legal, financial and/or investment advice and should not be construed and/or relied on as such. Before making any commitment of a legal and/or financial nature you should seek advice from a qualified and registered legal practitioner and/or financial and/or investment adviser. No material contained within this website should be construed or relied upon as providing recommendations in relation to any legal and/or financial product. Qluster does not recommend and/or endorse products and does not receive remuneration based upon investment and/or other decisions
US Government Bonds 10 YR Yield, US10Y - Weekly (W1)
Putting the real yield formula to work:
Real yield = Coupon rate (~2.94%) - Expected annual inflation rate (2.92%) = +0.02%
A nominal yield of 2.94% on the US10Y would refer to an investor purchasing the debt arrangement and receiving the annual fixed income for a ten year period. Factoring inflation expectations over the decade indicates that investors should expect a net positive gain of approximately 0.02% at current yields.
Furthermore, should banks pass on rates higher than the official rate, investors may even receive better returns by keeping funds in savings accounts.
However, the primary beneficiaries of rate hikes from a central bank are the financial institutions passing them down to the consumer.
Australian banks are among the strongest globally and are frequently stress-tested to see how they can handle hypothetical shocks to the economy. But, the Governor of the Reserve Bank of Australia, Philip Lowe, is yet to lift Australia's key cash rate from 0.10% and could be hinting at aggressively raising interest rates soon.
If the Reserve Bank of Australia also targets 3% by following in the Fed's footsteps, commercial banks will more likely be inclined to pass them down to investors.
Commonwealth Bank of Australia, ASX:CBA - Weekly (W1)
Australia and New Zealand Banking Group, ASX:ANZ - Weekly (W1)
National Australia Bank, ASX:NAB - Weekly (W1)
Westpac Banking Corporation, ASX:WBC- Weekly (W1)
This analysis may infer the merits of diversifying exposure to the 'Big Four' Australian Banks.
Moving to commodities, Gold and Silver tend to follow rising interest rates until they become too restrictive. At that point, earning guaranteed yields from fixed income securities or high-interest savings accounts may become more attractive to investors.
Gold Spot vs. USD, XAU/USD - Daily (D1)
If the XAU/USD pair can close above the psychological resistance level at US$ 2000 p/Oz, then markets may proceed to watch for the uptrend support to hold around US$ 1960 p/Oz.
Silver Spot, XAG/USD - Daily (D1)
XAG/USD looks to be riding the 50-day moving average (D1 50 MA, RED) as support.
So long as price action staves off a close below this technical indicator, market supply may provide ideal dip-buying opportunities in the coming sessions.
In line with simmering speculation, alternative assets like Bitcoin and Ethereum appear to paint signs of buyer impulse at long last. Although, it is very clear that there is still much work ahead for demand to steer price direction confidently.
Bitcoin vs. USD, $BTC - Weekly (W1)
Suppose Bitcoin can successfully squeeze prices higher and spend some time consolidating above the .236 Fibonacci retracement level.
In that case, a retest of the 200-day moving average (D1 200 MA, BLUE) may occur. Failing to do so could spark a further sell down to major horizontal support located around US$ 36K.
Bitcoin vs. USD, $BTC - Daily (D1)
Ethereum's structure shows some parallels with Bitcoin.
Bulls face the challenge of reversing resistance at the 0.382 Fibonacci retracement level into support. Otherwise, bears could pounce at the chance to pile on selling pressure and drive prices down to major horizontal support in the region of US$ 2.6K.
Ether vs. USD, $ETH - Weekly (W1)
Ether vs. USD, $ETH - Daily (D1)
While it is exciting to see Bitcoin and Ethereum recover to prices above US$ 40K and US$ 3K, respectively, it is crucial to recognise that more time consolidating is required before the reward outweighs the risk.
Q's Conclusion will be continued in tomorrow's video report.
Keen for some more learning? Make sure to check out last week’s Midweek Markets update…
See you again for the next update.
- q
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The information on this website is for general information purposes only. It is not intended as legal, financial and/or investment advice and should not be construed and/or relied on as such. Before making any commitment of a legal and/or financial nature you should seek advice from a qualified and registered legal practitioner and/or financial and/or investment adviser. No material contained within this website should be construed or relied upon as providing recommendations in relation to any legal and/or financial product. Qluster does not recommend and/or endorse products and does not receive remuneration based upon investment and/or other decisions
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