Australian Bond Exchange

ABE Weekly 09/06/2021

Market Update  


Always deliver more than expected” Larry Page, Co-Founder Google 


Following the release of the Governor’s statement on the June RBA Board meeting it now seems clear that the Board has no intention of extending the YCT (Yield Curve Target) bond from the April 2024 to the November 2024. Not extending YCT means that the gradual tightening we have seen through the YCT program in 2021 will not be reversed in July. The QE program has now matured to allow the Board more flexibility going forward suggesting further downward pressure on bond yields will be limited in the short term. We expect the Governor to announce an open ended $5 billion per week purchase program to be reviewed later in 2021 to be introduced following the completion of QE2. 

The bottom line here is that the RBA will continue to maintain stimulatory stance for the foreseeable future. Any change to this view will very much depend on tightening labour market conditions, unemployment, inflation and wages growth, none of which present a threat now. That said, and as we have mentioned before, it’s not only what’s happening on the domestic front that matters but most definitely the US and rest of world. 

The chart below illustrates this stimulatory stance by the RBA in pegging the 3-year Government Bond at 10bps in line with the official cash rate. This will be maintained as the status quo at least until 2023 but, although unlikely, is always subject to change. 

As mentioned in last week’s note our discussion topic for this week is technical analysisUnlike fundamental analysis, which attempts to evaluate a security’s value based on business results such as sales and earnings, technical analysis focuses on the study of price and volume.  

Technical analysis tools are used to determine the ways supply and demand for a security will affect changes in price, volume and implied volatility. Technical analysis is often used to generate short-term trading signals from various charting tools but can also help improve the evaluation of a security’s strength or weakness relative to the broader market or one of its sectors. This information helps analysts improve their overall valuation estimate. Technical analysis operates from the assumption that past trading activity and price changes of a security can be valuable indicators of the security’s future price movements when paired with appropriate investing or trading rules. Professional analysts often use technical analysis in conjunction with other forms of research. 

Technical analysis attempts to forecast the price movement of virtually any tradeable instrument that is generally subject to forces of supply and demand, including stocks, bonds, futures and currency pairs. In fact, some view technical analysis as simply the study of supply and demand forces as reflected in the market price movements of a security. Technical analysis most commonly applies to price changes, but some analysts track numbers other than just price, such as trading volume or open interest figures. 

Charles Dow, as in the Dow Jones Index, released a series of editorials discussing technical analysis theory. His writings included two basic assumptions that have continued to form the framework for technical analysis trading. 

  • Markets are efficient with values representing factors that influence a security’s price, but 
  • Even random market price movements appear to move in identifiable patterns and trends that tend to repeat over time. 

Despite its appeal in predicting future price movements, criticism of technical analysis is that history does not repeat itself exactly, so price pattern study is of dubious importance and can be ignored. Prices seem to be better modelled by the random walk hypothesis. 

Below is an example of one of the most used technical analysis tools – the moving average. Exponential Moving Average (EMA) is like Simple Moving Average (SMA), measuring trend direction over a period. However, whereas SMA simply calculates an average of price data, EMA applies more weight to data that is more current. Because of its unique calculation, EMA will follow prices more closely than a corresponding SMA. In terms of the chart below one could say that the trend points to lower prices – the EMA still under the SMA. If the EMA were to intersect the SMA from the bottom up it would suggest prices will head higher. 

The bottom line Is that fixed income is still massively underrepresented in almost every retail portfolio. Yet at the same time we have record levels of cash tied up in term deposits earning negative returns. We acknowledge that with greater return comes a little more risk, but we qualify every investment to make sure it meets not only ours but independent quality control.