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remains a better house in a bad neighbourhood
Tom Fitzpatrick 1-212-723-1344

Shyam Devani 44-207-986-3453

Jim Zhou 1-212-723-3469

Following our charts on the German DAX Index sent earlier today we take a broader look at European markets and conclude that across board (Equity and Bank indices, Fixed Income and FX), the U.S. looks to be better positioned vis a vis Europe. We believe a serious top may now be in place on European equity indices and the stand out chart is the German DAX Index which is in danger of falling to 6,000 The Germany – U.S. yield spread (2’s; 5’s; 10’s Germany minus 2’s; 5’s; 10’s U.S.) is making lower lows this week. German 10 year yields are at key levels and we maintain that they are likely to fall much further than U.S. 10 year yields This move down in EURUSD over the past week is something that is likely to last and see the pair back at the January 2012 lows. The downtrend is unlikely to stop there and our overall target of 1.10-1.15 (Possibly later this year) is still in place.

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Chart of the Day: A top looks to be in place on the German DAX Index

76.4% retracement

Double top

Triple negative divergence

Source: Aspen Graphics / Bloomberg 07 March 2012.

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Held the 76.4% retracement against last year’s high and shows triple negative divergence We also formed a double top and closed below the converged neckline and trend support yesterday (6,733). The double top targets 6,500. We are, however, more concerned with the hold of the 76.4% retracement against the highs and the weekly chart below which warns of a more aggressive move down towards (and possibly beyond) 6,000.

4% retracement Source: Aspen Graphics / Bloomberg 07 March 2012. it quickly fell to.Below 6.000 a danger 76. saw the DAX underperform the S&P 500 for more than three years As a result we can expect the DAX to underperform for this year and most of next year too Horizontal supports on this chart come in at the 3. DAX Index versus S&P 500 suggests DAX to underperform 1990 2000 2010 Source: Aspen Graphics / Bloomberg 07 March 2012 • • • • • The major highs on ratio above were at the same level every 10 years since 1990 The shorter term move up here seems to have run out of steam with weekly momentum crossing down from stretched levels not seen for 2 years It is not easy to come up with targets on this chart but note that previous turns down. and ultimately beyond. The hold of the 76. in 1990 and 2000. • • • The 55 week moving average currently comes in at 6.4% Fibonacci retracement against the highs as well as the stretched momentum suggests that we could be seeing the beginning of a decent trend towards that 200 week moving average below 6. the 200 week moving average.000.DAX Weekly Chart. and possibly beyond.519 When it broke below this average last year.75 area which is more than 20% away .

S. Right now the trend in fixed income markets remains one of lower yields and flatter curves. yields (also averaged across the curve:2Y+5Y+10Y) We have now taken out the Jan. Banks Source: Aspen Graphics / Bloomberg 07 March 2012.S Banks. we would almost certainly EVENTUALLY need to see rising yields in the U. • • • • • Above is the yield spread of German yields (averaged across the curve: 2Y+5Y+10Y) versus U. lows and are making new lows for this trend The dominant pattern is a head and shoulders top that targets minus 96 basis points If we are going to meet that target. We are now pushing the multi year low from 2003. (2Y+5Y+10Y averaged) yield spread H S S New trend lows this week Source: Aspen Graphics / Reuters 07 March 2012. ..S.. There is only one more support level at 2. • • A move down is European Banks underperforming U. we would need to focus on longer end yields which are going to move the spread above.S. Given how low 2 year and 5 year yields are in Germany and the U.31 (from 1996) Fixed Income Germany (2Y+5Y+10Y averaged) minus U.S.S. but that is for another day.European banks versus U.

75% A breach of that level would suggest another leg lower leaving only the 1. • • The long term chart shows the trend line support coming in at 60 basis points Hard to imagine us getting there (But then many things in the last 5 years seemed unimaginable) .early 2010 as the periphery of Europe (Greece) came into focus.63% low from last year as a support level The move of lower yields was 188 basis points from the high in April 2011. • • • • • • Sitting right on the base of the triangle consolidation at 1. Could we be approaching the end of this current consolidation again? German 10 year yields Source: Aspen Graphics / Reuters 07 March 2012. was 189 basis points before a consolidation. just after the ECB hiked.German 10 year yields 188 basis points down after the ECB hiked 189 basis points down after the ECB hiked Consolidation ended when the European Debt crisis emerged Same again ? Source: Aspen Graphics / Reuters 07 March 2012. German 10 year yields then started to fall again at the end of 2009. which was just after the ECB hiked rates Interestingly enough the trend down from the high in July 2008. So the two trends down in the chart above both followed an ECB rate hike and were both of the same magnitude before a consolidation.

S.Foreign Exchange The yield spread between Germany and the U. 2012 low at 1. EURUSD daily chart Source: Aspen Graphics / Reuters 07 March 2012. suggests a move to below 1.29 area.S.2624 Our big picture chart that overlays today’s price action with that seen in 1996-1997. is also giving a leading indication for EURUSD German 2Y+5Y+10Y yields minus U.15 is likely over time . 2Y+5Y+10Y (Equally weighted) Yield spread is leading EURUSD Source: Aspen Graphics / Reuters 07 March 2012.2974 and then the Jan. • • Currency pair now catching up The overlay says EURUSD should be around the 1. • • • • Bearish daily reversal at the highs of the last bounce Negative momentum divergence Breach of the short term rising trend support that held 2 sessions ago The next near term support level is 1.

Bottom Line • • • • • • The trend of European underperformance against the U. 2012 lows and beyond. Contact: CitiFX. All rights reserved. EURUSD is catching up with the yield spread overlay and should trend back down to the Jan.000 could lie ahead The Germany – U.75% and the only support level left below that is 1.S. Bottom line “It aint over till it’s over” and when it comes to Europe this crisis does not look to be over.EURUSD overlay with the 1990’s Source: Aspen Graphics / Reuters 07 March https://icg. .pdf © 2012 Citigroup Inc. Fixed Income markets (in terms of yields) and FX.63%.S. We believe a top is in place in the DAX Index and a move to at least 6. CITI and Arc Design is a registered service mark of Citigroup appears to be back in play This should materialise in The downtrend looks to be intact and much lower yields look likely. yield spread (averaged across the curve) is making new trend lows and that should continue going forward German 10 year yields are testing the base of the consolidation at 1.