What moves the Euro Area bond markets: Summary

In general, adjustments to prices are quick and new information is usually incorporated into prices within five minutes of announcements. The volatility adjustment is more long-lasting and excess volatility can be observe up to 30 minutes after the releases. Overall, German bond markets tend to react more strongly to the surprise component in US macro releases compared to the euro area and domestic releases, and the strength of these reactions to US releases has increased over the period considered.

Highlights

• Evidence is provided that the outcome of the German employment reports is known to investors ahead of the pre-scheduled release.
• Long-term bond yields can be seen as a weighted average of current and expected short -term interest rates over the maturity of the bond.
• Market participants may draw inferences about the euro area economy from US data releases. Only euro area releases that cause investors to revise their inferences should lead to market reactions.
• The announcements that seem to have a significant impact on long-term US bond yields are:
• Non-Farm Payroll
• Industrial Production
• New Home Sales
• Durable Goods Orders
• Producer Price Index
• Consumer Price Index
• Consumer Confidence Index
• ISM Manufacturing Index
• Housing Starts
• Initial Jobless Claims
• It is not clear if the strong observed price sensitivity for euro area bond yields from US macro announcements reflects real economy revisions and/or if it merely mirrors the strong financial integration between the two economies.
• The relation between target rate surprises and bond yields becomes negative when the slope of the curve is particularly steep.
• The surprise component is measured as [Surprise = (Actual - Expected)/Forecast Std. Error Deviation]
• Actual and forward looking measures of real economic activity and unemployment releases have a larger impact compared to price announcements.
• There is an immediate jump in the futures prices at the time of the announcement and little reaction thereafter.
• Policymakers can sometimes signal a preference for one or more macroeconomic indicators as input to their policy decisions for a given period.
• Key macroeconomic variables for countries which are growing in importance for the world economy may consequently over time retrieve increase attention.

Post Match

I started the day with what I believed was a good preparation. In this preparation I accounted for the possibility that today could be a very quiet day in terms of price movement.

With the past two days experience I was determined not to chase the price action and get caught into the trap of trading without any conviction about direction. Nevertheless to start the day off I did get involved at levels that I thougth could hold. Having tried these on several occasions and getting the direction wront I decided to stay out until a move.

I think overall I did ok, in comparison with previous sessions, as I got half of the initial losses back from the only decent move all day. Nevertheless perhaps if I had not rushed into the market at the start of the day, even if I had only done 1 winning trade, that would have ultimately yielded a positive P&L.

I did not see any good range trading opportunities today and given the amount I had lost already it would hace been too much of a gamble. For tomorrow I hope to see some movement to the quality of my level picking. It if range trades I shall stay in only if the market goes immediately on my side.

Notes from Trading Session

If I do 3 bad trades in a row I must cut my size down by a third.

I should always trade at levels , never feel tempted to get into the market just because you think you're missing an opportunity. Others will come.

Look for smaill opportunities in the BUND just a few seconds prior to the open of the US market as someone may be liquidating their positions (just like us!)

Excerpt: Crowds are primitive, and your trading strategies should be simple. You do not have to be a rocket scientist to design a winning trade: cut you losss and run the gains. It never pays to argue with the crownd. Simply use your judgement to decide when to join and when to leave.

Just not focused

Was I just not focused today or was I trying to sabotage my own actions?

At least I got some sleep, which is good because my body really needed it, yet on the other hand it set me up for a nervous start. I awoke 4 hours after schedule. At the very least I would be late into the office which is not good.

I checked the usual sources of information and did a quick pre-match prep. Perhaps too vague, but it was already 12pm. Put some trades on all with the direction of the previous day, which overall was to gain lost ground. Unfortunately no directional move occured. Market remaind still awaiting the US to take a stance. The only small move did go where expected, but did so long after I thought, from 116.32 to 116.26.

Then things got out of hand for me, caught the release of empoyment figure way at the high of the spike and lost attempting to scramble out. Made 2 out of 3 more bad trades on the settling after the figure. This was the biggest mistake of the day. I made a mental note not to trade like this.

Then the last figure of the day was out (ISM). I pressed the wrong button, partly because the figure were release in stages, and althought these weren't even out line, the market made me pay for my mistake.

At 47 ticks down, i decide to stay out for the day.

My trading manager tells me I should improve the measure of risk spread amongst trades. He could not understand how I go from taking 1 tick profits to sustaining 4 tick losses on subsequent bad trades.

He also reminded me that I should specify what-if scecnarios on my prematch prepsheet. Still, I think these are pretty obvious, at least in the format that my collegues write them. But to make them happy I must still make the effort.

I have also gone through some 30 pages of Trading for a Living by A. Elder.

I've also been thinking it could be a good idea to a positive trendline to manage my trading account, e.g. in order not let it go below a level.

New Year: Changed Expectations?

I'm eating my first bowl of cereal of the year whilst soaking in the news from the past Christmas week as part of my daily prep. I know, I should actually be asleep recovering from the health detrimental behaviour of the last couple of days. But what can I do, work is work, you just have to get on with it.

I decide to print out some charts and update the quotes from the last trading day. Immediately I see we have just hit a low that goes way back to August, after a massive sell off throughout the whole of December. Have paper traders readjusted their expectations in this period for the coming year, or have they been securing profits from their activity in the gone year?

I read some news, nothing out of the ordinary has happened. A little terrorist activity here, the odd tragedy there, but nothing that will have any direct and immediate impact on the world economy.

I go through my blog roll: talks on the "January effect", comments from "several reputable analysts" and "forecasters" blabbing on about how we have had a steady rally for "maybe" (and that is the key word) too long and it is time for a crash! Yet, as usual, nobody tells you when!

Timing is extremely important, especially when picking the bursting point. But none of these professionals wants to get their feet wet. So then, why should I?

OK, I'll do it anyway, at least for today: I think the undercurrent is still one of sustained global growth. A recession in the asian giants seems too far away, and would have to follow a prior period of slow down. Therefore demand and consumption from these countries will remain, thus enduring positive commercial opportunities for the rest of the world, especially for the major players in infrastructure industries.

On the other hand stocks have been steadily regaining ground lost in the now long gone post dotcom crash doldrums. The question remains whether the reminder of the dotcom episode has actually made people more cautious or more brave in their attitude towards exposure to risk. I think the steady gains we have seen in the last year are a consequence of slightly cautious yet confident investors trying to establish the next deed to put their money to. However, the herd has not yet followed. And this is where they key lies in regards to timing. If this year we see a steepening of the uptrend, then rest for sure it is a sign that we are approaching a reversal.

Fixed income will be very much dependant on how central banks interpret the general state of the economy. In my opinion they will implement cautionary measures if the growth levels remain high, but may will spread them out so long as inflation, which is their only "official" concern, remains under control. In the short term the prevailing sentiment could be that a rebound is called for after the December sell off, having there been few clearly identifiable reason for such a price difference.

My trades for the day: Bounce off low with day uptrend at least to last session's highs for the morning session. US will probably be quiet being a half day, so Bund price will stay horizontal in the afternoon